This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Guangdong Land Holdings Limited's (HKG:124) P/E ratio to inform your assessment of the investment opportunity. What is Guangdong Land Holdings's P/E ratio? Well, based on the last twelve months it is 16.18. In other words, at today's prices, investors are paying HK$16.18 for every HK$1 in prior year profit.

View our latest analysis for Guangdong Land Holdings

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Guangdong Land Holdings:

P/E of 16.18 = HKD1.21 ÷ HKD0.07 (Based on the trailing twelve months to June 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

How Does Guangdong Land Holdings's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (6.5) for companies in the real estate industry is lower than Guangdong Land Holdings's P/E.

Guangdong Land Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Guangdong Land Holdings increased earnings per share by an impressive 14% over the last twelve months. In contrast, EPS has decreased by 7.9%, annually, over 5 years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).