In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Lifestyle China Group Limited’s (HKG:2136) P/E ratio could help you assess the value on offer. Lifestyle China Group has a P/E ratio of 14.68, based on the last twelve months. That means that at current prices, buyers pay HK$14.68 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Lifestyle China Group
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Lifestyle China Group:
P/E of 14.68 = CN¥2.54 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.17 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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.
Lifestyle China Group’s earnings per share fell by 13% in the last twelve months.
How Does Lifestyle China Group’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below Lifestyle China Group has a P/E ratio that is fairly close for the average for the multiline retail industry, which is 14.7.
That indicates that the market expects Lifestyle China Group will perform roughly in line with other companies in its industry. So if Lifestyle China Group actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. 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.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).