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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Shui On Land Limited’s (HKG:272) P/E ratio and reflect on what it tells us about the company’s share price. Shui On Land has a price to earnings ratio of 6.21, based on the last twelve months. That means that at current prices, buyers pay HK$6.21 for every HK$1 in trailing yearly profits.
See our latest analysis for Shui On Land
How Do You Calculate Shui On Land’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Shui On Land:
P/E of 6.21 = CN¥1.54 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.25 (Based on the year to June 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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Notably, Shui On Land grew EPS by a whopping 63% in the last year. And its annual EPS growth rate over 3 years is 15%. I’d therefore be a little surprised if its P/E ratio was not relatively high. In contrast, EPS has decreased by 13%, annually, over 5 years.
How Does Shui On Land’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Shui On Land has a higher P/E than the average company (5.2) in the real estate industry.
Its relatively high P/E ratio indicates that Shui On Land 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.