The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use HK Electric Investments and HK Electric Investments Limited's (HKG:2638) P/E ratio to inform your assessment of the investment opportunity. What is HK Electric Investments and HK Electric Investments's P/E ratio? Well, based on the last twelve months it is 24.68. That corresponds to an earnings yield of approximately 4.1%.

See our latest analysis for HK Electric Investments and HK Electric Investments

How Do I Calculate HK Electric Investments and HK Electric Investments's Price To Earnings Ratio?

The formula for P/E is:

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

Or for HK Electric Investments and HK Electric Investments:

P/E of 24.68 = HKD7.76 ÷ HKD0.31 (Based on the trailing twelve months to June 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Does HK Electric Investments and HK Electric Investments's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, HK Electric Investments and HK Electric Investments has a higher P/E than the average company (14.8) in the electric utilities industry.

That means that the market expects HK Electric Investments and HK Electric Investments will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. 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.

HK Electric Investments and HK Electric Investments shrunk earnings per share by 16% over the last year. And over the longer term (5 years) earnings per share have decreased 12% annually. This could justify a pessimistic P/E.

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

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.