In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Sino Harbour Holdings Group Limited's (HKG:1663), to help you decide if the stock is worth further research. Based on the last twelve months, Sino Harbour Holdings Group's P/E ratio is 7.83. That means that at current prices, buyers pay HK$7.83 for every HK$1 in trailing yearly profits.
See our latest analysis for Sino Harbour Holdings Group
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Sino Harbour Holdings Group:
P/E of 7.83 = CN¥0.119 ÷ CN¥0.015 (Based on the trailing twelve months to September 2019.)
(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each CN¥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.
Does Sino Harbour Holdings Group Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Sino Harbour Holdings Group has a higher P/E than the average (6.2) P/E for companies in the real estate industry.
That means that the market expects Sino Harbour Holdings Group 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. 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.
In the last year, Sino Harbour Holdings Group grew EPS like Taylor Swift grew her fan base back in 2010; the 146% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down 25% per year over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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).