The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Red Star Macalline Group Corporation Ltd.’s (HKG:1528), to help you decide if the stock is worth further research. Red Star Macalline Group has a P/E ratio of 5.2, based on the last twelve months. That is equivalent to an earnings yield of about 19%.
How Do You Calculate Red Star Macalline Group’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Red Star Macalline Group:
P/E of 5.2 = CN¥6.24 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥1.2 (Based on the year to December 2018.)
Is A High P/E 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 Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Red Star Macalline Group’s earnings per share grew by -6.2% in the last twelve months. And its annual EPS growth rate over 5 years is 3.5%.
How Does Red Star Macalline Group’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 Red Star Macalline Group has a lower P/E than the average (6.5) P/E for companies in the real estate industry.
Its relatively low P/E ratio indicates that Red Star Macalline Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Red Star Macalline Group, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
How Does Red Star Macalline Group’s Debt Impact Its P/E Ratio?
Red Star Macalline Group’s net debt is 75% of its market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Bottom Line On Red Star Macalline Group’s P/E Ratio
Red Star Macalline Group has a P/E of 5.2. That’s below the average in the HK market, which is 12. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ 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.
Of course you might be able to find a better stock than Red Star Macalline Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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. Thank you for reading.