Should We Worry About Chow Tai Fook Jewellery Group Limited's (HKG:1929) P/E Ratio?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Chow Tai Fook Jewellery Group Limited's (HKG:1929), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Chow Tai Fook Jewellery Group has a P/E ratio of 17.01. That corresponds to an earnings yield of approximately 5.9%.

View our latest analysis for Chow Tai Fook Jewellery Group

How Do You Calculate Chow Tai Fook Jewellery Group's P/E Ratio?

The formula for P/E is:

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

Or for Chow Tai Fook Jewellery Group:

P/E of 17.01 = HKD7.10 ÷ HKD0.42 (Based on the trailing twelve months to September 2019.)

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. 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.

Does Chow Tai Fook Jewellery Group 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 Chow Tai Fook Jewellery Group has a higher P/E than the average (11.0) P/E for companies in the specialty retail industry.

Its relatively high P/E ratio indicates that Chow Tai Fook Jewellery Group shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Chow Tai Fook Jewellery Group saw earnings per share decrease by 1.9% last year. But EPS is up 17% over the last 3 years. And EPS is down 8.4% a year, over the last 5 years. So it would be surprising to see a high P/E.

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

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Chow Tai Fook Jewellery Group's Balance Sheet

Chow Tai Fook Jewellery Group has net debt worth 23% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Verdict On Chow Tai Fook Jewellery Group's P/E Ratio

Chow Tai Fook Jewellery Group's P/E is 17.0 which is above average (9.7) in its market. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.

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. 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.

But note: Chow Tai Fook Jewellery Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.

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.