The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use HK Electric Investments and HK Electric Investments Limited's (HKG:2638) P/E ratio to inform your assessment of the investment opportunity. What is HK Electric Investments and HK Electric Investments's P/E ratio? Well, based on the last twelve months it is 24.68. That corresponds to an earnings yield of approximately 4.1%.

See our latest analysis for HK Electric Investments and HK Electric Investments

How Do I Calculate HK Electric Investments and HK Electric Investments's Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for HK Electric Investments and HK Electric Investments:

P/E of 24.68 = HKD7.76 ÷ HKD0.31 (Based on the trailing twelve months to June 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Does HK Electric Investments and HK Electric Investments's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, HK Electric Investments and HK Electric Investments has a higher P/E than the average company (14.8) in the electric utilities industry.

That means that the market expects HK Electric Investments and HK Electric Investments 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

When earnings fall, the 'E' decreases, over time. 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.

HK Electric Investments and HK Electric Investments shrunk earnings per share by 16% over the last year. And over the longer term (5 years) earnings per share have decreased 12% annually. This could justify a pessimistic P/E.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. 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 expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

HK Electric Investments and HK Electric Investments's Balance Sheet

HK Electric Investments and HK Electric Investments's net debt is 63% of its market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Bottom Line On HK Electric Investments and HK Electric Investments's P/E Ratio

HK Electric Investments and HK Electric Investments trades on a P/E ratio of 24.7, which is above its market average of 9.8. With relatively high debt, and no earnings per share growth over twelve months, it's safe to say the market believes the company will improve its earnings growth in the future.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than HK Electric Investments and HK Electric Investments. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.