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 Asia Standard International Group Limited's (HKG:129) P/E ratio to inform your assessment of the investment opportunity. What is Asia Standard International Group's P/E ratio? Well, based on the last twelve months it is 1.48. That means that at current prices, buyers pay HK$1.48 for every HK$1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Asia Standard International Group:
P/E of 1.48 = HK$1.25 ÷ HK$0.84 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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.
Does Asia Standard International Group Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Asia Standard International Group has a lower P/E than the average (6.4) in the real estate industry classification.
Its relatively low P/E ratio indicates that Asia Standard International Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Asia Standard International Group, 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.
Asia Standard International Group shrunk earnings per share by 9.7% last year. And EPS is down 1.4% a year, over the last 5 years. So you wouldn't expect a very high P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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).
Is Debt Impacting Asia Standard International Group's P/E?
Asia Standard International Group's net debt equates to 47% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Asia Standard International Group's P/E Ratio
Asia Standard International Group has a P/E of 1.5. That's below the average in the HK market, which is 10.1. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.
You might be able to find a better buy than Asia Standard International Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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.
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.