This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Speed Apparel Holding Limited’s (HKG:8183) P/E ratio to inform your assessment of the investment opportunity. Speed Apparel Holding has a P/E ratio of 10.2, based on the last twelve months. That corresponds to an earnings yield of approximately 9.8%.
See our latest analysis for Speed Apparel Holding
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Speed Apparel Holding:
P/E of 10.2 = HK$0.50 ÷ HK$0.049 (Based on the year 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 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 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 nice to see that Speed Apparel Holding grew EPS by a stonking 163% in the last year. And earnings per share have improved by 6.4% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Speed Apparel Holding’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (10.2) for companies in the luxury industry is roughly the same as Speed Apparel Holding’s P/E.
That indicates that the market expects Speed Apparel Holding will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. 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.