The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Redco Properties Group Limited's (HKG:1622) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Redco Properties Group has a P/E ratio of 10.98. In other words, at today's prices, investors are paying HK$10.98 for every HK$1 in prior year profit.

View our latest analysis for Redco Properties Group

How Do I Calculate Redco Properties Group's Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for Redco Properties Group:

P/E of 10.98 = CN¥3.201 ÷ CN¥0.291 (Based on the trailing twelve months to December 2019.)

(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)

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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Does Redco Properties 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 Redco Properties Group has a higher P/E than the average (6.1) P/E for companies in the real estate industry.

Its relatively high P/E ratio indicates that Redco Properties Group shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Redco Properties Group saw earnings per share improve by 4.5% last year. And its annual EPS growth rate over 5 years is 21%.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.