Should We Worry About Wharf Real Estate Investment Company Limited’s (HKG:1997) 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 Wharf Real Estate Investment Company Limited’s (HKG:1997) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Wharf Real Estate Investment’s P/E ratio is 8.51. That means that at current prices, buyers pay HK$8.51 for every HK$1 in trailing yearly profits.

Check out our latest analysis for Wharf Real Estate Investment

How Do I Calculate Wharf Real Estate Investment’s Price To Earnings Ratio?

The formula for P/E is:

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

Or for Wharf Real Estate Investment:

P/E of 8.51 = HKD41.60 ÷ HKD4.89 (Based on the year to June 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 HKD1 the company has earned over the last year. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Does Wharf Real Estate Investment’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 Wharf Real Estate Investment has a higher P/E than the average (6.5) P/E for companies in the real estate industry.

SEHK:1997 Price Estimation Relative to Market, February 10th 2020
SEHK:1997 Price Estimation Relative to Market, February 10th 2020

Its relatively high P/E ratio indicates that Wharf Real Estate Investment 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 further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. 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.

Wharf Real Estate Investment saw earnings per share decrease by 34% last year.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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. 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.

How Does Wharf Real Estate Investment’s Debt Impact Its P/E Ratio?

Net debt is 29% of Wharf Real Estate Investment’s market cap. While it’s worth keeping this in mind, it isn’t a worry.

The Verdict On Wharf Real Estate Investment’s P/E Ratio

Wharf Real Estate Investment has a P/E of 8.5. That’s below the average in the HK market, which is 10.0. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.