This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Lee and Man Paper Manufacturing Limited's (HKG:2314) P/E ratio and reflect on what it tells us about the company's share price. Lee and Man Paper Manufacturing has a P/E ratio of 6.25, based on the last twelve months. That corresponds to an earnings yield of approximately 16.0%.
How Do I Calculate Lee and Man Paper Manufacturing's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Lee and Man Paper Manufacturing:
P/E of 6.25 = HK$4.620 ÷ HK$0.739 (Based on the year to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. 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'.
How Does Lee and Man Paper Manufacturing'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. The image below shows that Lee and Man Paper Manufacturing has a lower P/E than the average (7.6) P/E for companies in the forestry industry.
Its relatively low P/E ratio indicates that Lee and Man Paper Manufacturing shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Lee and Man Paper Manufacturing saw earnings per share decrease by 33% last year. But over the longer term (5 years) earnings per share have increased by 13%.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
How Does Lee and Man Paper Manufacturing's Debt Impact Its P/E Ratio?
Lee and Man Paper Manufacturing's net debt equates to 47% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Lee and Man Paper Manufacturing's P/E Ratio
Lee and Man Paper Manufacturing has a P/E of 6.2. That's below the average in the HK market, which is 9.1. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
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.