Here's What Chow Tai Fook Jewellery Group Limited's (HKG:1929) P/E Is Telling Us
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Chow Tai Fook Jewellery Group Limited's (HKG:1929) P/E ratio to inform your assessment of the investment opportunity. Chow Tai Fook Jewellery Group has a P/E ratio of 17.13, based on the last twelve months. That corresponds to an earnings yield of approximately 5.8%.
Check out our latest analysis for Chow Tai Fook Jewellery Group
How Do You Calculate Chow Tai Fook Jewellery Group's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Chow Tai Fook Jewellery Group:
P/E of 17.13 = HKD7.15 ÷ HKD0.42 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HKD1 of company earnings. 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 Chow Tai Fook Jewellery Group 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. You can see in the image below that the average P/E (11.3) 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. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or 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. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Chow Tai Fook Jewellery Group shrunk earnings per share by 1.9% last year. But it has grown its earnings per share by 17% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 8.4% annually. So we might expect a relatively low P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Chow Tai Fook Jewellery Group's Balance Sheet
Chow Tai Fook Jewellery Group has net debt worth 20% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Verdict On Chow Tai Fook Jewellery Group's P/E Ratio
Chow Tai Fook Jewellery Group has a P/E of 17.1. That's higher than the average in its market, which is 10.3. With some debt but no EPS growth last year, the market has high expectations of future profits.
Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Chow Tai Fook Jewellery Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
