Do You Like Emperor Watch & Jewellery Limited (HKG:887) At This P/E Ratio?

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 Emperor Watch & Jewellery Limited's (HKG:887), to help you decide if the stock is worth further research. Emperor Watch & Jewellery has a price to earnings ratio of 8.74, based on the last twelve months. That corresponds to an earnings yield of approximately 11.4%.

See our latest analysis for Emperor Watch & Jewellery

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Emperor Watch & Jewellery:

P/E of 8.74 = HK$0.116 ÷ HK$0.013 (Based on the year to December 2019.)

(Note: the above calculation results may not be precise due to rounding.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.

How Does Emperor Watch & Jewellery's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below Emperor Watch & Jewellery has a P/E ratio that is fairly close for the average for the specialty retail industry, which is 8.7.

Its P/E ratio suggests that Emperor Watch & Jewellery shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Emperor Watch & Jewellery actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

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. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Emperor Watch & Jewellery's earnings per share fell by 66% in the last twelve months. And it has shrunk its earnings per share by 7.9% per year over the last five years. This could justify a pessimistic P/E.

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

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Emperor Watch & Jewellery's Balance Sheet Tell Us?

Net debt totals 69% of Emperor Watch & Jewellery'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 Watch & Jewellery's P/E Ratio

Emperor Watch & Jewellery's P/E is 8.7 which is about average (9.1) in the HK market. With meaningful debt, and no earnings per share growth last year, even an average P/E indicates that the market a significant improvement from the business.

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 you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Emperor Watch & Jewellery. 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.