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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 Ever Reach Group (Holdings) Company Limited's (HKG:3616) P/E ratio to inform your assessment of the investment opportunity. Ever Reach Group (Holdings) has a P/E ratio of 4.32, based on the last twelve months. In other words, at today's prices, investors are paying HK$4.32 for every HK$1 in prior year profit.
See our latest analysis for Ever Reach Group (Holdings)
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Ever Reach Group (Holdings):
P/E of 4.32 = CN¥0.878 ÷ CN¥0.203 (Based on the year to June 2019.)
(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each CN¥1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Ever Reach Group (Holdings) Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Ever Reach Group (Holdings) has a lower P/E than the average (6.2) in the real estate industry classification.
Ever Reach Group (Holdings)'s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Ever Reach Group (Holdings) maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 22%.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.