Advertisement

Here's How P/E Ratios Can Help Us Understand Shun Ho Property Investments Limited (HKG:219)

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Shun Ho Property Investments Limited's (HKG:219) P/E ratio could help you assess the value on offer. Shun Ho Property Investments has a P/E ratio of 2.32, based on the last twelve months. That means that at current prices, buyers pay HK$2.32 for every HK$1 in trailing yearly profits.

See our latest analysis for Shun Ho Property Investments

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Shun Ho Property Investments:

P/E of 2.32 = HKD1.89 ÷ HKD0.82 (Based on the trailing twelve months to June 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 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 Shun Ho Property Investments Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (11.7) for companies in the hospitality industry is higher than Shun Ho Property Investments's P/E.

SEHK:219 Price Estimation Relative to Market, February 29th 2020
SEHK:219 Price Estimation Relative to Market, February 29th 2020

Its relatively low P/E ratio indicates that Shun Ho Property Investments shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Shun Ho Property Investments, it's quite possible it could surprise on the upside. 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Shun Ho Property Investments saw earnings per share decrease by 50% last year. But it has grown its earnings per share by 18% per year over the last three years. And it has shrunk its earnings per share by 12% per year over the last five years. This growth rate might warrant a below average P/E ratio.

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. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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 Shun Ho Property Investments's P/E?

Net debt is 37% of Shun Ho Property Investments's market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Shun Ho Property Investments's P/E Ratio

Shun Ho Property Investments's P/E is 2.3 which is below average (9.9) in the HK market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

Investors should be looking to buy stocks that the market is wrong about. 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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Shun Ho Property Investments. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.