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Despite Its High P/E Ratio, Is Wharf Real Estate Investment Company Limited (HKG:1997) Still Undervalued?

Simply Wall St

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Wharf Real Estate Investment Company Limited's (HKG:1997) P/E ratio and reflect on what it tells us about the company's share price. Wharf Real Estate Investment has a price to earnings ratio of 8.87, based on the last twelve months. That means that at current prices, buyers pay HK$8.87 for every HK$1 in trailing yearly profits.

View our latest analysis for Wharf Real Estate Investment

How Do I Calculate Wharf Real Estate Investment's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Wharf Real Estate Investment:

P/E of 8.87 = HK$43.35 ÷ HK$4.89 (Based on the trailing twelve months to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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 Wharf Real Estate Investment 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. The image below shows that Wharf Real Estate Investment has a higher P/E than the average (6.1) P/E for companies in the real estate industry.

SEHK:1997 Price Estimation Relative to Market, October 14th 2019

That means that the market expects Wharf Real Estate Investment will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. 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

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.

Wharf Real Estate Investment's earnings per share fell by 34% in the last twelve months.

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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 Wharf Real Estate Investment's P/E?

Wharf Real Estate Investment's net debt equates to 28% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Wharf Real Estate Investment's P/E Ratio

Wharf Real Estate Investment trades on a P/E ratio of 8.9, which is below the HK market average of 10.3. 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. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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.

Of course you might be able to find a better stock than Wharf Real Estate Investment. So you may wish to see this free collection of other companies that have grown earnings strongly.

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 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. Thank you for reading.