In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Asia Commercial Holdings Limited’s (HKG:104) P/E ratio could help you assess the value on offer. Asia Commercial Holdings has a P/E ratio of 4.98, based on the last twelve months. That is equivalent to an earnings yield of about 20%.
See our latest analysis for Asia Commercial Holdings
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 Asia Commercial Holdings:
P/E of 4.98 = HK$0.40 ÷ HK$0.080 (Based on the trailing twelve months to March 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. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Asia Commercial Holdings increased earnings per share by a whopping 102% last year. And it has bolstered its earnings per share by 75% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Asia Commercial Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Asia Commercial Holdings has a lower P/E than the average (9.6) P/E for companies in the specialty retail industry.
Its relatively low P/E ratio indicates that Asia Commercial Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Asia Commercial Holdings, 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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).