This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Logan Property Holdings Company Limited's (HKG:3380) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Logan Property Holdings has a P/E ratio of 6.84. That means that at current prices, buyers pay HK$6.84 for every HK$1 in trailing yearly profits.

See our latest analysis for Logan Property Holdings

How Do I Calculate Logan Property Holdings's Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for Logan Property Holdings:

P/E of 6.84 = CN¥10.11 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥1.48 (Based on the year to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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.

Does Logan Property Holdings Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Logan Property Holdings has a higher P/E than the average (6) P/E for companies in the real estate industry.

That means that the market expects Logan Property Holdings will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. 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

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Logan Property Holdings increased earnings per share by a whopping 26% last year. And its annual EPS growth rate over 5 years is 26%. With that performance, I would expect it to have an above average P/E ratio.

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

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.