Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Luks Group (Vietnam Holdings) Company Limited's (HKG:366) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Luks Group (Vietnam Holdings)'s P/E ratio is 4.87. That means that at current prices, buyers pay HK$4.87 for every HK$1 in trailing yearly profits.

See our latest analysis for Luks Group (Vietnam 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 Luks Group (Vietnam Holdings):

P/E of 4.87 = HKD1.58 ÷ HKD0.32 (Based on the year to June 2019.)

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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Does Luks Group (Vietnam Holdings)'s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Luks Group (Vietnam Holdings) has a lower P/E than the average (5.6) in the basic materials industry classification.

Luks Group (Vietnam Holdings)'s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Luks Group (Vietnam Holdings), it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Luks Group (Vietnam Holdings)'s 89% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. And earnings per share have improved by 20% annually, over the last three years. So you might say it really deserves to have an above-average P/E ratio. Unfortunately, earnings per share are down 4.3% a year, over 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).