In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Karrie International Holdings Limited’s (HKG:1050) P/E ratio and reflect on what it tells us about the company’s share price. Karrie International Holdings has a price to earnings ratio of 10.82, based on the last twelve months. That is equivalent to an earnings yield of about 9.2%.
See our latest analysis for Karrie International Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Karrie International Holdings:
P/E of 10.82 = HK$1.13 ÷ HK$0.10 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings 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
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. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s great to see that Karrie International Holdings grew EPS by 21% in the last year. And its annual EPS growth rate over 5 years is 34%. So one might expect an above average P/E ratio.
How Does Karrie International 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 (8.2) for companies in the electronic industry is lower than Karrie International Holdings’s P/E.
Its relatively high P/E ratio indicates that Karrie International Holdings shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.