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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Bank of Jiujiang Co Ltd’s (HKG:6190) P/E ratio and reflect on what it tells us about the company’s share price. Bank of Jiujiang has a price to earnings ratio of 9.37, based on the last twelve months. In other words, at today’s prices, investors are paying HK$9.37 for every HK$1 in prior year profit.
See our latest analysis for Bank of Jiujiang
How Do I Calculate Bank of Jiujiang’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Bank of Jiujiang:
P/E of 9.37 = CN¥9.41 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥1 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Bank of Jiujiang’s earnings per share grew by -5.1% in the last twelve months. Unfortunately, earnings per share are down 6.7% a year, over 5 years.
How Does Bank of Jiujiang’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, Bank of Jiujiang has a higher P/E than the average company (5.7) in the banks industry.
Bank of Jiujiang’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.