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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 China Lesso Group Holdings Limited's (HKG:2128) P/E ratio to inform your assessment of the investment opportunity. What is China Lesso Group Holdings's P/E ratio? Well, based on the last twelve months it is 6.4. That means that at current prices, buyers pay HK$6.4 for every HK$1 in trailing yearly profits.
View our latest analysis for China Lesso Group Holdings
How Do You Calculate China Lesso Group Holdings's P/E 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 China Lesso Group Holdings:
P/E of 6.4 = CN¥5.14 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.80 (Based on the year 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 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
China Lesso Group Holdings increased earnings per share by 8.7% last year. And its annual EPS growth rate over 5 years is 11%.
Does China Lesso Group Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (7.9) for companies in the building industry is higher than China Lesso Group Holdings's P/E.
This suggests that market participants think China Lesso Group Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You 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
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.