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Does Luk Fook Holdings (International) Limited's (HKG:590) P/E Ratio Signal A Buying Opportunity?

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Simply Wall St
·4-min read
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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Luk Fook Holdings (International) Limited's (HKG:590) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Luk Fook Holdings (International) has a P/E ratio of 6.88. That corresponds to an earnings yield of approximately 14.5%.

See our latest analysis for Luk Fook Holdings (International)

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Luk Fook Holdings (International):

P/E of 6.88 = HK$15.500 ÷ HK$2.254 (Based on the trailing twelve months to September 2019.)

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

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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 Luk Fook Holdings (International)'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 Luk Fook Holdings (International) has a lower P/E than the average (9.3) P/E for companies in the specialty retail industry.

SEHK:590 Price Estimation Relative to Market April 24th 2020
SEHK:590 Price Estimation Relative to Market April 24th 2020

Luk Fook Holdings (International)'s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Luk Fook Holdings (International), it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or 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. Then, a lower P/E should attract more buyers, pushing the share price up.

Luk Fook Holdings (International) saw earnings per share decrease by 13% last year. But EPS is up 13% over the last 3 years. And EPS is down 4.9% a year, over the last 5 years. This might lead to muted expectations.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

So What Does Luk Fook Holdings (International)'s Balance Sheet Tell Us?

Since Luk Fook Holdings (International) holds net cash of HK$763m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On Luk Fook Holdings (International)'s P/E Ratio

Luk Fook Holdings (International)'s P/E is 6.9 which is below average (9.3) in the HK market. The recent drop in earnings per share would make investors cautious, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there's real potential that the low P/E could eventually indicate undervaluation.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Luk Fook Holdings (International). 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.