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 Smart Globe Holdings Limited’s (HKG:8485) P/E ratio to inform your assessment of the investment opportunity. Smart Globe Holdings has a P/E ratio of 6.93, based on the last twelve months. That is equivalent to an earnings yield of about 14%.
Check out our latest analysis for Smart Globe Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Smart Globe Holdings:
P/E of 6.93 = HK$0.076 ÷ HK$0.011 (Based on the year to September 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. 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.’
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Notably, Smart Globe Holdings grew EPS by a whopping 70% in the last year. But earnings per share are down 45% per year over the last three years.
How Does Smart Globe Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (13.5) for companies in the commercial services industry is higher than Smart Globe Holdings’s P/E.
Its relatively low P/E ratio indicates that Smart Globe Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).