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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how China Grand Pharmaceutical and Healthcare Holdings Limited's (HKG:512) P/E ratio could help you assess the value on offer. Based on the last twelve months, China Grand Pharmaceutical and Healthcare Holdings's P/E ratio is 18.2. That is equivalent to an earnings yield of about 5.5%.

See our latest analysis for China Grand Pharmaceutical and Healthcare Holdings

How Do I Calculate China Grand Pharmaceutical and Healthcare Holdings's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for China Grand Pharmaceutical and Healthcare Holdings:

P/E of 18.2 = HK$5.05 ÷ HK$0.28 (Based on the trailing twelve months to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

It's nice to see that China Grand Pharmaceutical and Healthcare Holdings grew EPS by a stonking 35% in the last year. And its annual EPS growth rate over 5 years is 31%. So we'd generally expect it to have a relatively high P/E ratio.

How Does China Grand Pharmaceutical and Healthcare Holdings'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 China Grand Pharmaceutical and Healthcare Holdings has a higher P/E than the average (14.4) P/E for companies in the pharmaceuticals industry.

China Grand Pharmaceutical and Healthcare 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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.