In This Article:
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 Yeebo (International Holdings) Limited's (HKG:259) P/E ratio could help you assess the value on offer. Yeebo (International Holdings) has a P/E ratio of 4.30, based on the last twelve months. In other words, at today's prices, investors are paying HK$4.30 for every HK$1 in prior year profit.
See our latest analysis for Yeebo (International Holdings)
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 Yeebo (International Holdings):
P/E of 4.30 = HK$1.14 ÷ HK$0.27 (Based on the trailing twelve months to September 2019.)
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.
How Does Yeebo (International Holdings)'s P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Yeebo (International Holdings) has a lower P/E than the average (9.1) in the electronic industry classification.
Its relatively low P/E ratio indicates that Yeebo (International Holdings) shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
In the last year, Yeebo (International Holdings) grew EPS like Taylor Swift grew her fan base back in 2010; the 102% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 19% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio. Regrettably, the longer term performance is poor, with EPS down -19% per year over 3 years.
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. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.