The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Asian Hotels (West) Limited’s (NSE:AHLWEST) P/E ratio and reflect on what it tells us about the company’s share price. Looking at earnings over the last twelve months, Asian Hotels (West) has a P/E ratio of 5.72. In other words, at today’s prices, investors are paying ?5.72 for every ?1 in prior year profit.
Check out our latest analysis for Asian Hotels (West)
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 Asian Hotels (West):
P/E of 5.72 = ?276.10 ÷ ?48.30 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings 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 Asian Hotels (West)’s P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Asian Hotels (West) has a lower P/E than the average (20.7) P/E for companies in the hospitality industry.
NSEI:AHLWEST Price Estimation Relative to Market, November 15th 2019
Asian Hotels (West)’s P/E tells us that market participants think it will not fare as well as its peers in the same industry.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Asian Hotels (West)’s earnings made like a rocket, taking off 134% last year. Shareholders have some reason to be optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
So What Does Asian Hotels (West)’s Balance Sheet Tell Us?
Asian Hotels (West)’s net debt is considerable, at 221% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.
The Bottom Line On Asian Hotels (West)’s P/E Ratio
Asian Hotels (West) trades on a P/E ratio of 5.7, which is below the IN market average of 13.2. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Asian Hotels (West). 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).
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.
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. Thank you for reading.
