Here’s What Gemdale Properties and Investment Corporation Limited’s (HKG:535) P/E Is Telling Us

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Chris Amalia

Tue, Feb 19, 2019, 6:00 PM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Gemdale Properties and Investment Corporation Limited’s (HKG:535) P/E ratio and reflect on what it tells us about the company’s share price. Gemdale Properties and Investment has a P/E ratio of 6.62, based on the last twelve months. That is equivalent to an earnings yield of about 15%.

View our latest analysis for Gemdale Properties and Investment

How Do You Calculate Gemdale Properties and Investment’s P/E Ratio?

The formula for price to earnings is:

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

Or for Gemdale Properties and Investment:

P/E of 6.62 = CN¥0.76 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.11 (Based on the trailing twelve months to June 2018.)

Is A High P/E 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.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Gemdale Properties and Investment increased earnings per share by a whopping 28% last year. And it has bolstered its earnings per share by 16% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.

How Does Gemdale Properties and Investment’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, Gemdale Properties and Investment has a higher P/E than the average company (5.7) in the real estate industry.

Its relatively high P/E ratio indicates that Gemdale Properties and Investment shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

Gemdale Properties and Investment’s Balance Sheet

Net debt totals 52% of Gemdale Properties and Investment’s market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Gemdale Properties and Investment’s P/E Ratio

Gemdale Properties and Investment’s P/E is 6.6 which is below average (10.7) in the HK market. The company may have significant debt, but EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Gemdale Properties and Investment. So you may wish to see this free collection of other companies that have grown earnings strongly.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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