In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Paradise Entertainment Limited's (HKG:1180) P/E ratio and reflect on what it tells us about the company's share price. Paradise Entertainment has a P/E ratio of 17.68, based on the last twelve months. That corresponds to an earnings yield of approximately 5.7%.
Check out our latest analysis for Paradise Entertainment
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Paradise Entertainment:
P/E of 17.68 = HK$0.88 ÷ HK$0.05 (Based on the year to June 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 Paradise Entertainment Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Paradise Entertainment has a higher P/E than the average company (12.0) in the hospitality industry.
That means that the market expects Paradise Entertainment will outperform other companies in its industry. 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
P/E ratios primarily reflect market expectations around earnings growth rates. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, Paradise Entertainment grew EPS like Taylor Swift grew her fan base back in 2010; the 50% gain was both fast and well deserved. Unfortunately, earnings per share are down 13% a year, over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.