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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Powerlong Real Estate Holdings Limited's (HKG:1238) P/E ratio to inform your assessment of the investment opportunity. What is Powerlong Real Estate Holdings's P/E ratio? Well, based on the last twelve months it is 4.49. That means that at current prices, buyers pay HK$4.49 for every HK$1 in trailing yearly profits.
How Do I Calculate Powerlong Real Estate Holdings's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Powerlong Real Estate Holdings:
P/E of 4.49 = CN¥3.19 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.71 (Based on the year to December 2018.)
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 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
Powerlong Real Estate Holdings's earnings per share fell by 16% in the last twelve months. But it has grown its earnings per share by 15% per year over the last five years.
Does Powerlong Real Estate Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Powerlong Real Estate Holdings has a lower P/E than the average (6.3) P/E for companies in the real estate industry.
Powerlong Real Estate Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.
Is Debt Impacting Powerlong Real Estate Holdings's P/E?
Powerlong Real Estate Holdings's net debt is considerable, at 268% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Bottom Line On Powerlong Real Estate Holdings's P/E Ratio
Powerlong Real Estate Holdings has a P/E of 4.5. That's below the average in the HK market, which is 10.9. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Powerlong Real Estate Holdings. 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).
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.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.