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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Tse Sui Luen Jewellery (International) Limited's (HKG:417) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Tse Sui Luen Jewellery (International) has a P/E ratio of 10.11. That means that at current prices, buyers pay HK$10.11 for every HK$1 in trailing yearly profits.
See our latest analysis for Tse Sui Luen Jewellery (International)
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Tse Sui Luen Jewellery (International):
P/E of 10.11 = HK$1.28 ÷ HK$0.13 (Based on the trailing twelve months to September 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does Tse Sui Luen Jewellery (International) 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, Tse Sui Luen Jewellery (International) has a higher P/E than the average company (8.7) in the luxury industry.
Its relatively high P/E ratio indicates that Tse Sui Luen Jewellery (International) 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
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Tse Sui Luen Jewellery (International) saw earnings per share decrease by 37% last year. But over the longer term (3 years), earnings per share have increased by 16%. And it has shrunk its earnings per share by 10% per year over the last five years. This might lead to muted expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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).