Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Regal Hotels International Holdings Limited's (HKG:78) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Regal Hotels International Holdings's P/E ratio is 9.22. That is equivalent to an earnings yield of about 11%.
Check out our latest analysis for Regal Hotels International Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Regal Hotels International Holdings:
P/E of 9.22 = HK$4.44 ÷ HK$0.48 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
Does Regal Hotels International Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Regal Hotels International Holdings has a lower P/E than the average (12.7) P/E for companies in the hospitality industry.
This suggests that market participants think Regal Hotels International Holdings will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Regal Hotels International Holdings shrunk earnings per share by 52% over the last year. But over the longer term (5 years) earnings per share have increased by 13%.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.