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 Lion Rock Group Limited's (HKG:1127) P/E ratio and reflect on what it tells us about the company's share price. What is Lion Rock Group's P/E ratio? Well, based on the last twelve months it is 5.59. That is equivalent to an earnings yield of about 18%.
View our latest analysis for Lion Rock Group
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Lion Rock Group:
P/E of 5.59 = HK$1.23 ÷ HK$0.22 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. 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.
Does Lion Rock Group Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Lion Rock Group has a lower P/E than the average (12.2) in the commercial services industry classification.
Its relatively low P/E ratio indicates that Lion Rock Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Lion Rock Group, it's quite possible it could surprise on the upside. 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. 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 Lion Rock Group grew EPS by 15% in the last year. And earnings per share have improved by 5.7% annually, over the last five years. So one might expect an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.