# Should We Worry About Hing Lee (HK) Holdings Limited’s (HKG:396) P/E Ratio?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Hing Lee (HK) Holdings Limited’s (HKG:396) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Hing Lee (HK) Holdings’s P/E ratio is 33.96. That corresponds to an earnings yield of approximately 2.9%.

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### How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Hing Lee (HK) Holdings:

P/E of 33.96 = HK\$0.30 ÷ HK\$0.0090 (Based on the trailing twelve months to June 2018.)

### Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK\$1 of company earnings. 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

When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

Hing Lee (HK) Holdings’s earnings per share fell by 19% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 4.7%. And over the longer term (3 years) earnings per share have decreased 47% annually. This might lead to low expectations.

### How Does Hing Lee (HK) Holdings’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Hing Lee (HK) Holdings has a much higher P/E than the average company (10.9) in the consumer durables industry.

Hing Lee (HK) 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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

### 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

### How Does Hing Lee (HK) Holdings’s Debt Impact Its P/E Ratio?

Hing Lee (HK) Holdings has net debt worth just 9.7% of its market capitalization. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

### The Verdict On Hing Lee (HK) Holdings’s P/E Ratio

Hing Lee (HK) Holdings has a P/E of 34. That’s significantly higher than the average in the HK market, which is 10.3. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.

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. 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.

But note: Hing Lee (HK) Holdings 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).

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.