In This Article:
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 Goldlion Holdings Limited’s (HKG:533) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Goldlion Holdings’s P/E ratio is 8.84. In other words, at today’s prices, investors are paying HK$8.84 for every HK$1 in prior year profit.
View our latest analysis for Goldlion Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Goldlion Holdings:
P/E of 8.84 = HK$3.11 ÷ HK$0.35 (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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Goldlion Holdings increased earnings per share by 3.3% last year. Unfortunately, earnings per share are down 6.4% a year, over 5 years.
How Does Goldlion Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (9.8) for companies in the specialty retail industry is higher than Goldlion Holdings’s P/E.
Its relatively low P/E ratio indicates that Goldlion Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).