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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Wing Tai Holdings Limited's (SGX:W05) P/E ratio to inform your assessment of the investment opportunity. What is Wing Tai Holdings's P/E ratio? Well, based on the last twelve months it is 10.29. That is equivalent to an earnings yield of about 9.7%.
View our latest analysis for Wing Tai Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Wing Tai Holdings:
P/E of 10.29 = SGD2.02 ÷ SGD0.20 (Based on the year to March 2019.)
Is A High P/E 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
In the last year, Wing Tai Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 60% gain was both fast and well deserved. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 8.0%. On the other hand, the longer term performance is poor, with EPS down 17% per year over 5 years.
How Does Wing Tai Holdings's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (8.8) for companies in the real estate industry is lower than Wing Tai Holdings's P/E.
Wing Tai Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. 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. 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.