This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Milestone Builder Holdings Limited's (HKG:1667) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Milestone Builder Holdings's P/E ratio is 10.47. That corresponds to an earnings yield of approximately 9.5%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Milestone Builder Holdings:
P/E of 10.47 = HK$0.19 ÷ HK$0.018 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Milestone Builder Holdings 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 Milestone Builder Holdings has a P/E ratio that is roughly in line with the construction industry average (10.1).
Milestone Builder Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. 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
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Milestone Builder Holdings shrunk earnings per share by 6.3% last year. And it has shrunk its earnings per share by 23% per year over the last three years. This growth rate might warrant a low P/E ratio. So we might expect a relatively low P/E.
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.
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).
So What Does Milestone Builder Holdings's Balance Sheet Tell Us?
Milestone Builder Holdings has net debt worth 75% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On Milestone Builder Holdings's P/E Ratio
Milestone Builder Holdings has a P/E of 10.5. That's around the same as the average in the HK market, which is 10.6. With meaningful debt, and no earnings per share growth last year, even an average P/E indicates that the market a significant improvement from the business.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
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 email@example.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.