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 Allied Properties (H.K.) Limited's (HKG:56) P/E ratio to inform your assessment of the investment opportunity. What is Allied Properties (H.K.)'s P/E ratio? Well, based on the last twelve months it is 5.36. That means that at current prices, buyers pay HK$5.36 for every HK$1 in trailing yearly profits.
How Do I Calculate Allied Properties (H.K.)'s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Allied Properties (H.K.):
P/E of 5.36 = HK$1.55 ÷ HK$0.29 (Based on the year to June 2019.)
Is A High P/E 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'.
Does Allied Properties (H.K.) Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (6.6) for companies in the consumer finance industry is higher than Allied Properties (H.K.)'s P/E.
Allied Properties (H.K.)'s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Allied Properties (H.K.), it's quite possible it could surprise on the upside. 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
If earnings fall then in the future the 'E' will be lower. 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.
Allied Properties (H.K.) saw earnings per share decrease by 44% last year. But over the longer term (5 years) earnings per share have increased by 6.6%. And it has shrunk its earnings per share by 5.2% per year over the last three years. This could justify a low P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
So What Does Allied Properties (H.K.)'s Balance Sheet Tell Us?
Net debt totals 90% of Allied Properties (H.K.)'s market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On Allied Properties (H.K.)'s P/E Ratio
Allied Properties (H.K.) has a P/E of 5.4. That's below the average in the HK market, which is 10.5. 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 should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
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.