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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 show how you can use Bosideng International Holdings Limited’s (HKG:3998) P/E ratio to inform your assessment of the investment opportunity. Bosideng International Holdings has a price to earnings ratio of 18.73, based on the last twelve months. That corresponds to an earnings yield of approximately 5.3%.
Check out our latest analysis for Bosideng International Holdings
How Do I Calculate Bosideng International Holdings’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Bosideng International Holdings:
P/E of 18.73 = CN¥1.23 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.065 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Bosideng International Holdings increased earnings per share by a whopping 67% last year. And it has improved its earnings per share by 40% per year over the last three years. So we’d generally expect it to have a relatively high P/E ratio. In contrast, EPS has decreased by 16%, annually, over 5 years.
How Does Bosideng International 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. As you can see below, Bosideng International Holdings has a higher P/E than the average company (9.9) in the luxury industry.
Bosideng International Holdings’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.