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 Perfect Group International Holdings Limited’s (HKG:3326) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Perfect Group International Holdings’s P/E ratio is 30.6. In other words, at today’s prices, investors are paying HK$30.6 for every HK$1 in prior year profit.
View our latest analysis for Perfect Group International Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Perfect Group International Holdings:
P/E of 30.6 = HK$0.88 ÷ HK$0.029 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company 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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
It’s great to see that Perfect Group International Holdings grew EPS by 13% in the last year. Unfortunately, earnings per share are down 57% a year, over 5 years.
How Does Perfect Group International Holdings’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Perfect Group International Holdings has a higher P/E than the average company (10.2) in the luxury industry.
Perfect Group International Holdings’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.