Is Sweeten Real Estate Development Co.,Ltd.'s (TPE:5525) P/E Ratio Really That Good?

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Sweeten Real Estate Development Co.,Ltd.'s (TPE:5525) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Sweeten Real Estate DevelopmentLtd's P/E ratio is 8.51. That is equivalent to an earnings yield of about 11.7%.

Check out our latest analysis for Sweeten Real Estate DevelopmentLtd

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Sweeten Real Estate DevelopmentLtd:

P/E of 8.51 = TWD22.70 ÷ TWD2.67 (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 TWD1 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.

Does Sweeten Real Estate DevelopmentLtd Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (14.6) for companies in the real estate industry is higher than Sweeten Real Estate DevelopmentLtd's P/E.

This suggests that market participants think Sweeten Real Estate DevelopmentLtd will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.

Sweeten Real Estate DevelopmentLtd saw earnings per share decrease by 16% last year. But EPS is up 19% over the last 5 years.

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

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

Sweeten Real Estate DevelopmentLtd's Balance Sheet

Sweeten Real Estate DevelopmentLtd has net debt worth 79% of its market capitalization. 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 Verdict On Sweeten Real Estate DevelopmentLtd's P/E Ratio

Sweeten Real Estate DevelopmentLtd trades on a P/E ratio of 8.5, which is below the TW market average of 17.0. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations.

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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Sweeten Real Estate DevelopmentLtd. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.