Here’s What Shui On Land Limited’s (HKG:272) P/E Is Telling Us
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Shui On Land Limited’s (HKG:272) P/E ratio and reflect on what it tells us about the company’s share price. Shui On Land has a price to earnings ratio of 6.21, based on the last twelve months. That means that at current prices, buyers pay HK$6.21 for every HK$1 in trailing yearly profits.
See our latest analysis for Shui On Land
How Do You Calculate Shui On Land’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Shui On Land:
P/E of 6.21 = CN¥1.54 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.25 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Notably, Shui On Land grew EPS by a whopping 63% in the last year. And its annual EPS growth rate over 3 years is 15%. I’d therefore be a little surprised if its P/E ratio was not relatively high. In contrast, EPS has decreased by 13%, annually, over 5 years.
How Does Shui On Land’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Shui On Land has a higher P/E than the average company (5.2) in the real estate industry.
Its relatively high P/E ratio indicates that Shui On Land shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. 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.
Shui On Land’s Balance Sheet
Shui On Land has net debt worth a very significant 200% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.
The Bottom Line On Shui On Land’s P/E Ratio
Shui On Land’s P/E is 6.2 which is below average (10.8) in the HK market. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
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 visual report on analyst forecasts could hold they key to an excellent investment decision.
Of course you might be able to find a better stock than Shui On Land. So you may wish to see this free collection of other companies that have grown earnings strongly.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.