In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Goal Forward Holdings Limited's (HKG:1854) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Goal Forward Holdings's P/E ratio is 16.74. That corresponds to an earnings yield of approximately 6.0%.
See our latest analysis for Goal Forward Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Goal Forward Holdings:
P/E of 16.74 = HK$0.21 ÷ HK$0.013 (Based on the year to March 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.'
How Does Goal Forward Holdings's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (16.8) for companies in the consumer retailing industry is roughly the same as Goal Forward Holdings's P/E.
That indicates that the market expects Goal Forward Holdings will perform roughly in line with other companies in its industry. So if Goal Forward Holdings actually outperforms its peers going forward, that should be a positive for the share price. 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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Goal Forward Holdings's earnings per share fell by 30% in the last twelve months. But over the longer term (3 years), earnings per share have increased by 2.8%.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).