This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use SKYCITY Entertainment Group Limited's (NZSE:SKC) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, SKYCITY Entertainment Group's P/E ratio is 15.21. That means that at current prices, buyers pay NZ$15.21 for every NZ$1 in trailing yearly profits.

View our latest analysis for SKYCITY Entertainment Group

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 SKYCITY Entertainment Group:

P/E of 15.21 = NZD3.62 ÷ NZD0.24 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each NZD1 the company has earned over the last year. 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 Does SKYCITY Entertainment Group's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below SKYCITY Entertainment Group has a P/E ratio that is fairly close for the average for the hospitality industry, which is 15.2.

Its P/E ratio suggests that SKYCITY Entertainment Group shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

SKYCITY Entertainment Group maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 7.0%.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.