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 look at Space Group Holdings Limited's (HKG:2448) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Space Group Holdings's P/E ratio is 15.04. That corresponds to an earnings yield of approximately 6.7%.
See our latest analysis for Space Group Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Space Group Holdings:
P/E of 15.04 = MOP1.226 ÷ MOP0.082 (Based on the year to December 2019.)
(Note: the above calculation uses the share price in the reporting currency, namely MOP 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 MOP1 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 Space Group Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Space Group Holdings has a higher P/E than the average company (7.9) in the construction industry.
That means that the market expects Space Group Holdings will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. 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
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.
Space Group Holdings had pretty flat EPS growth in the last year. And it has shrunk its earnings per share by 10% per year over the last three years. This growth rate might warrant a low P/E ratio. So it would be surprising to see a high P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.