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 SmarTone Telecommunications Holdings Limited’s (HKG:315) P/E ratio could help you assess the value on offer. SmarTone Telecommunications Holdings has a P/E ratio of 16.02, based on the last twelve months. That corresponds to an earnings yield of approximately 6.2%.
Check out our latest analysis for SmarTone Telecommunications Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for SmarTone Telecommunications Holdings:
P/E of 16.02 = HK$8.88 ÷ HK$0.55 (Based on the year to June 2018.)
Is A High P/E 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
SmarTone Telecommunications Holdings shrunk earnings per share by 10% over the last year. And over the longer term (5 years) earnings per share have decreased 3.3% annually. This could justify a pessimistic P/E.
How Does SmarTone Telecommunications 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 (14.9) for companies in the wireless telecom industry is lower than SmarTone Telecommunications Holdings’s P/E.
SmarTone Telecommunications Holdings’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. 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).