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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at China Ludao Technology Company Limited's (HKG:2023) P/E ratio and reflect on what it tells us about the company's share price. China Ludao Technology has a P/E ratio of 20.35, based on the last twelve months. That means that at current prices, buyers pay HK$20.35 for every HK$1 in trailing yearly profits.

View our latest analysis for China Ludao Technology

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for China Ludao Technology:

P/E of 20.35 = CN¥1.02 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.050 (Based on the trailing twelve months to December 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. 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. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

China Ludao Technology's earnings per share grew by -9.8% in the last twelve months. And its annual EPS growth rate over 3 years is 13%. In contrast, EPS has decreased by 1.4%, annually, over 5 years.

How Does China Ludao Technology's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that China Ludao Technology has a lower P/E than the average (26.3) P/E for companies in the household products industry.

Its relatively low P/E ratio indicates that China Ludao Technology shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.