【sheehy ford of marlow heights marlow heights md】Here’s What Emperor Capital Group Limited’s (HKG:717) P/E Ratio Is Telling Us

This sheehy ford of marlow heights marlow heights mdarticle is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Emperor Capital Group Limited’s (

HKG:717

) P/E ratio to inform your assessment of the investment opportunity.

Emperor Capital Group has a price to earnings ratio of 4.36

, based on the last twelve months. That corresponds to an earnings yield of approximately 23%.

View our latest analysis for Emperor Capital Group

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 Emperor Capital Group:

P/E of 4.36 = HK$0.35 ÷ HK$0.081 (Based on the year to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying

a higher price

for each HK$1 of company earnings. 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 Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Emperor Capital Group shrunk earnings per share by 18% over the last year. But over the longer term (5 years) earnings per share have increased by 9.0%. And over the longer term (3 years) earnings per share have decreased 2.7% annually. This might lead to low expectations.

How Does Emperor Capital Group’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (12.6) for companies in the capital markets industry is higher than Emperor Capital Group’s P/E.

SEHK:717 PE PEG Gauge January 2nd 19

This suggests that market participants think Emperor Capital Group will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking

if insiders are buying shares

, because that might imply they believe the stock is undervalued.

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. 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 taking on debt (or spending its remaining 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 Emperor Capital Group’s Debt Impact Its P/E Ratio?

Net debt totals 31% of Emperor Capital Group’s 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 Verdict On Emperor Capital Group’s P/E Ratio

Emperor Capital Group trades on a P/E ratio of 4.4, which is below the HK market average of 10.4. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don’t have analyst forecasts, but shareholders might want to examine

this detailed historical graph

of earnings, revenue and cash flow.

You might be able to find a better buy than Emperor Capital 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).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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