This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Goldin Financial Holdings Limited’s (HKG:530) P/E ratio to inform your assessment of the investment opportunity. Goldin Financial Holdings has a price to earnings ratio of 16.34, based on the last twelve months. In other words, at today’s prices, investors are paying HK$16.34 for every HK$1 in prior year profit.
View our latest analysis for Goldin Financial Holdings
How Do I Calculate Goldin Financial Holdings’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Goldin Financial Holdings:
P/E of 16.34 = HK$2.81 ÷ HK$0.17 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Goldin Financial Holdings saw earnings per share decrease by 15% last year. But over the longer term (5 years) earnings per share have increased by 9.2%.
How Does Goldin Financial Holdings’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Goldin Financial Holdings has a lower P/E than the average (29.3) in the beverage industry classification.
Its relatively low P/E ratio indicates that Goldin Financial Holdings shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.