Is Royale Furniture Holdings Limited’s (HKG:1198) High P/E Ratio A Problem For Investors?

Andrew Carroll

Thu, Jan 31, 2019, 5:55 PM

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 Royale Furniture Holdings Limited’s (HKG:1198) P/E ratio could help you assess the value on offer. Royale Furniture Holdings has a price to earnings ratio of 36.74, based on the last twelve months. That is equivalent to an earnings yield of about 2.7%.

Check out our latest analysis for Royale Furniture Holdings

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Royale Furniture Holdings:

P/E of 36.74 = HK$0.91 ÷ HK$0.025 (Based on the year to June 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Royale Furniture Holdings saw earnings per share decrease by 4.0% last year. But it has grown its earnings per share by 65% per year over the last five years.

How Does Royale Furniture Holdings’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (11.3) for companies in the consumer durables industry is a lot lower than Royale Furniture Holdings’s P/E.

Its relatively high P/E ratio indicates that Royale Furniture Holdings shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

Don’t forget that the P/E ratio considers market capitalization. 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).