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 TK Group (Holdings) Limited's (HKG:2283) P/E ratio and reflect on what it tells us about the company's share price. TK Group (Holdings) has a price to earnings ratio of 12.85, based on the last twelve months. In other words, at today's prices, investors are paying HK$12.85 for every HK$1 in prior year profit.
See our latest analysis for TK Group (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 TK Group (Holdings):
P/E of 12.85 = HK$5.4 ÷ HK$0.42 (Based on the year to December 2018.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Most would be impressed by TK Group (Holdings) earnings growth of 16% in the last year. And earnings per share have improved by 14% annually, over the last five years. This could arguably justify a relatively high P/E ratio.
Does TK Group (Holdings) 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 TK Group (Holdings) has a higher P/E than the average (9.8) P/E for companies in the machinery industry.
Its relatively high P/E ratio indicates that TK Group (Holdings) shareholders think it will perform better than other companies in its industry classification. 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.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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).