In This Article:
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 Ka Shui International Holdings Limited’s (HKG:822) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Ka Shui International Holdings’s P/E ratio is 9.85. That is equivalent to an earnings yield of about 10%.
See our latest analysis for Ka Shui International Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Ka Shui International Holdings:
P/E of 9.85 = HK$0.34 ÷ HK$0.035 (Based on the year 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. 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.
Ka Shui International Holdings saw earnings per share decrease by 60% last year. But over the longer term (3 years), earnings per share have increased by 37%. And over the longer term (5 years) earnings per share have decreased 16% annually. This could justify a pessimistic P/E.
How Does Ka Shui International Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (9.3) for companies in the machinery industry is roughly the same as Ka Shui International Holdings’s P/E.
That indicates that the market expects Ka Shui International Holdings will perform roughly in line with other companies in its industry. So if Ka Shui International Holdings actually outperforms its peers going forward, that should be a positive for the share price. I inform my view byby checking management tenure and remuneration, among other things.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.