This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Miramar Hotel and Investment Company Limited’s (HKG:71) P/E ratio could help you assess the value on offer. Miramar Hotel and Investment Company has a P/E ratio of 5.89, based on the last twelve months. In other words, at today’s prices, investors are paying HK$5.89 for every HK$1 in prior year profit.
See our latest analysis for Miramar Hotel and Investment Company
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 Miramar Hotel and Investment Company:
P/E of 5.89 = HK$14.38 ÷ HK$2.44 (Based on the year to June 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 isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Miramar Hotel and Investment Company shrunk earnings per share by 1.2% last year. But over the longer term (5 years) earnings per share have increased by 1.1%.
How Does Miramar Hotel and Investment Company’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (14.5) for companies in the hospitality industry is higher than Miramar Hotel and Investment Company’s P/E.
Its relatively low P/E ratio indicates that Miramar Hotel and Investment Company shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Miramar Hotel and Investment Company, it’s quite possible it could surprise on the upside. You 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
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.