In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at EEKA Fashion Holdings Limited's (HKG:3709) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, EEKA Fashion Holdings has a P/E ratio of 12.76. That corresponds to an earnings yield of approximately 7.8%.
View our latest analysis for EEKA Fashion Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for EEKA Fashion Holdings:
P/E of 12.76 = CN¥7.63 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.60 (Based on the year to June 2019.)
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 EEKA Fashion Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (11.9) for companies in the specialty retail industry is lower than EEKA Fashion Holdings's P/E.
EEKA Fashion 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
EEKA Fashion Holdings's earnings per share grew by -4.9% in the last twelve months. And its annual EPS growth rate over 5 years is 19%.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.