This article 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 Billion Industrial Holdings Limited's (HKG:2299) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Billion Industrial Holdings's P/E ratio is 11.47. That is equivalent to an earnings yield of about 8.7%.

Check out our latest analysis for Billion Industrial Holdings

How Do I Calculate Billion Industrial Holdings'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 Billion Industrial Holdings:

P/E of 11.47 = CN¥4.608 ÷ CN¥0.402 (Based on the trailing twelve months to December 2019.)

(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each CN¥1 the company has earned over the last year. 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 Billion Industrial Holdings's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (7.4) for companies in the luxury industry is lower than Billion Industrial Holdings's P/E.

That means that the market expects Billion Industrial Holdings will outperform other companies in its industry. 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.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Billion Industrial Holdings increased earnings per share by an impressive 10% over the last twelve months. And it has bolstered its earnings per share by 34% per year over the last five years. This could arguably justify a relatively high P/E ratio.

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

Don't forget that the P/E ratio considers market capitalization. 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.