In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Southeast Asia Properties & Finance Limited’s (HKG:252) P/E ratio and reflect on what it tells us about the company’s share price. Southeast Asia Properties & Finance has a P/E ratio of 27.79, based on the last twelve months. That is equivalent to an earnings yield of about 3.6%.
See our latest analysis for Southeast Asia Properties & Finance
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 Southeast Asia Properties & Finance:
P/E of 27.79 = HK$3.42 ÷ HK$0.12 (Based on the trailing twelve months to September 2018.)
Is A High P/E 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. 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.
Southeast Asia Properties & Finance’s earnings per share fell by 75% in the last twelve months. But over the longer term (3 years), earnings per share have increased by 15%. And over the longer term (5 years) earnings per share have decreased 22% annually. This growth rate might warrant a below average P/E ratio.
How Does Southeast Asia Properties & Finance’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (11.4) for companies in the packaging industry is lower than Southeast Asia Properties & Finance’s P/E.
That means that the market expects Southeast Asia Properties & Finance will outperform other companies in its industry. 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.