Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Times Neighborhood Holdings Limited's (HKG:9928) P/E ratio and reflect on what it tells us about the company's share price. Times Neighborhood Holdings has a P/E ratio of 37.57, based on the last twelve months. That is equivalent to an earnings yield of about 2.7%.

See our latest analysis for Times Neighborhood Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for Times Neighborhood Holdings:

P/E of 37.57 = CN¥4.808 ÷ CN¥0.128 (Based on the year to December 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 implies that investors pay a higher price for the earning power of the business. 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 Times Neighborhood 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 Times Neighborhood Holdings has a significantly higher P/E than the average (10.3) P/E for companies in the commercial services industry.

Its relatively high P/E ratio indicates that Times Neighborhood Holdings shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. 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

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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

In the last year, Times Neighborhood Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 50% gain was both fast and well deserved.

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

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.