In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use K & P International Holdings Limited's (HKG:675) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, K & P International Holdings's P/E ratio is 59.13. That is equivalent to an earnings yield of about 1.7%.
View our latest analysis for K & P International 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 K & P International Holdings:
P/E of 59.13 = HK$0.51 ÷ HK$0.01 (Based on the trailing twelve months to June 2019.)
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. 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.
Does K & P International Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that K & P International Holdings has a significantly higher P/E than the average (8.4) P/E for companies in the electronic industry.
K & P International Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
K & P International Holdings shrunk earnings per share by 29% over the last year. And over the longer term (5 years) earnings per share have decreased 38% annually. This growth rate might warrant a below average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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 investing in growth. That means taking on debt (or spending its cash).