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 Tian An China Investments Company Limited's (HKG:28) P/E ratio to inform your assessment of the investment opportunity. Tian An China Investments has a P/E ratio of 4.15, based on the last twelve months. That corresponds to an earnings yield of approximately 24.1%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Tian An China Investments:
P/E of 4.15 = HK$3.49 ÷ HK$0.84 (Based on the trailing twelve months to June 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 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.
How Does Tian An China Investments's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Tian An China Investments has a lower P/E than the average (6.7) P/E for companies in the real estate industry.
Its relatively low P/E ratio indicates that Tian An China Investments shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Tian An China Investments, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Tian An China Investments increased earnings per share by 3.9% last year. And earnings per share have improved by 34% annually, over the last five years. Unfortunately, earnings per share are down 24% a year, over 3 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. 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.
Tian An China Investments's Balance Sheet
Net debt totals 80% of Tian An China Investments's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Tian An China Investments's P/E Ratio
Tian An China Investments trades on a P/E ratio of 4.1, which is below the HK market average of 10.1. It's good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations.
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. Although we don't have analyst forecasts 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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.