What Does Chow Tai Fook Jewellery Group Limited's (HKG:1929) P/E Ratio Tell You?
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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 apply a basic P/E ratio analysis to Chow Tai Fook Jewellery Group Limited's (HKG:1929), to help you decide if the stock is worth further research. What is Chow Tai Fook Jewellery Group's P/E ratio? Well, based on the last twelve months it is 16.28. That means that at current prices, buyers pay HK$16.28 for every HK$1 in trailing yearly profits.
See our latest analysis for Chow Tai Fook Jewellery Group
How Do I Calculate Chow Tai Fook Jewellery Group's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Chow Tai Fook Jewellery Group:
P/E of 16.28 = HK$7.45 ÷ HK$0.46 (Based on the year to March 2019.)
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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. 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.
Chow Tai Fook Jewellery Group increased earnings per share by an impressive 12% over the last twelve months. And its annual EPS growth rate over 3 years is 16%. This could arguably justify a relatively high P/E ratio. In contrast, EPS has decreased by 8.8%, annually, over 5 years.
Does Chow Tai Fook Jewellery Group Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (11.5) for companies in the specialty retail industry is lower than Chow Tai Fook Jewellery Group's P/E.
Its relatively high P/E ratio indicates that Chow Tai Fook Jewellery Group shareholders think it will perform better than other companies in its industry classification. 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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.
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).
Is Debt Impacting Chow Tai Fook Jewellery Group's P/E?
Net debt totals 14% of Chow Tai Fook Jewellery Group's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On Chow Tai Fook Jewellery Group's P/E Ratio
Chow Tai Fook Jewellery Group trades on a P/E ratio of 16.3, which is above the HK market average of 10.8. While the company does use modest debt, its recent earnings growth is very good. Therefore, it's not particularly surprising that it has a above average P/E ratio.
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.
You might be able to find a better buy than Chow Tai Fook Jewellery Group. 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 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.
