In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Skyworth Digital Holdings Limited’s (HKG:751) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Skyworth Digital Holdings’s P/E ratio is 12.05. In other words, at today’s prices, investors are paying HK$12.05 for every HK$1 in prior year profit.
View our latest analysis for Skyworth Digital 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 Skyworth Digital Holdings:
P/E of 12.05 = HK$2.16 ÷ HK$0.18 (Based on the trailing twelve months to March 2018.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Skyworth Digital Holdings saw earnings per share decrease by 60% last year. And it has shrunk its earnings per share by 11% per year over the last five years. This might lead to muted expectations.
How Does Skyworth Digital Holdings’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below Skyworth Digital Holdings has a P/E ratio that is fairly close for the average for the consumer durables industry, which is 11.8.
Skyworth Digital Holdings’s P/E tells us that market participants think its prospects are roughly in line with its industry. So if Skyworth Digital Holdings actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.