This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at REM Group (Holdings) Limited’s (HKG:1750) P/E ratio and reflect on what it tells us about the company’s share price. REM Group (Holdings) has a P/E ratio of 12.31, based on the last twelve months. In other words, at today’s prices, investors are paying HK$12.31 for every HK$1 in prior year profit.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for REM Group (Holdings):
P/E of 12.31 = HK$0.098 ÷ HK$0.008 (Based on the trailing twelve months to June 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does REM Group (Holdings)’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that REM Group (Holdings) has a higher P/E than the average (8.8) P/E for companies in the electrical industry.
REM Group (Holdings)’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
REM Group (Holdings)’s earnings per share grew by -4.9% in the last twelve months. But earnings per share are down 14% per year over the last five years.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
REM Group (Holdings)’s Balance Sheet
With net cash of HK$84m, REM Group (Holdings) has a very strong balance sheet, which may be important for its business. Having said that, at 48% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On REM Group (Holdings)’s P/E Ratio
REM Group (Holdings)’s P/E is 12.3 which is above average (9.7) in its market. Earnings improved over the last year. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders think it will.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than REM Group (Holdings). So you may wish to see this free collection of other companies that have grown earnings strongly.
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.