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 Lumina Group Limited's (HKG:8470) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Lumina Group's P/E ratio is 6.46. That means that at current prices, buyers pay HK$6.46 for every HK$1 in trailing yearly profits.
See our latest analysis for Lumina Group
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 Lumina Group:
P/E of 6.46 = HK$0.28 ÷ HK$0.04 (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 HK$1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Lumina Group 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. We can see in the image below that the average P/E (14.0) for companies in the commercial services industry is higher than Lumina Group's P/E.
Lumina Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, Lumina Group grew EPS like Taylor Swift grew her fan base back in 2010; the 98% gain was both fast and well deserved. Having said that, the average EPS growth over the last three years wasn't so good, coming in at 1.7%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.