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Is Kerry Properties Limited's (HKG:683) High P/E Ratio A Problem For Investors?

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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 show how you can use Kerry Properties Limited's (HKG:683) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Kerry Properties has a P/E ratio of 6.55. That is equivalent to an earnings yield of about 15%.

Check out our latest analysis for Kerry Properties

How Do You Calculate Kerry Properties's P/E Ratio?

The formula for P/E is:

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

Or for Kerry Properties:

P/E of 6.55 = HK$33.8 ÷ HK$5.16 (Based on the year to December 2018.)

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.'

How Does Kerry Properties's P/E Ratio Compare To Its Peers?

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 (6.5) for companies in the real estate industry is roughly the same as Kerry Properties's P/E.

SEHK:683 Price Estimation Relative to Market, July 15th 2019

Kerry Properties's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Kerry Properties actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

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. 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.

Kerry Properties's earnings per share fell by 19% in the last twelve months. But over the longer term (3 years), earnings per share have increased by 11%.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Kerry Properties's Balance Sheet

Kerry Properties's net debt equates to 42% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Kerry Properties's P/E Ratio

Kerry Properties trades on a P/E ratio of 6.5, which is below the HK market average of 10.7. 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. 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. 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 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.

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.