In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Hotel Grand Central Limited's (SGX:H18) P/E ratio and reflect on what it tells us about the company's share price. Hotel Grand Central has a price to earnings ratio of 38.26, based on the last twelve months. That corresponds to an earnings yield of approximately 2.6%.
View our latest analysis for Hotel Grand Central
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Hotel Grand Central:
P/E of 38.26 = SGD1.30 ÷ SGD0.03 (Based on the year to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Hotel Grand Central Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (26.6) for companies in the hospitality industry is lower than Hotel Grand Central's P/E.
Hotel Grand Central'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.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Hotel Grand Central shrunk earnings per share by 24% over the last year. And EPS is down 20% a year, over the last 3 years. This might lead to low expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.