This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at China Saite Group Company Limited's (HKG:153) P/E ratio and reflect on what it tells us about the company's share price. What is China Saite Group's P/E ratio? Well, based on the last twelve months it is 4.17. In other words, at today's prices, investors are paying HK$4.17 for every HK$1 in prior year profit.

See our latest analysis for China Saite Group

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for China Saite Group:

P/E of 4.17 = CN¥0.19 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.046 (Based on the trailing twelve months to June 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Does China Saite Group's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (9.3) for companies in the construction industry is higher than China Saite Group's P/E.

China Saite Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with China Saite Group, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

China Saite Group shrunk earnings per share by 55% over the last year. And EPS is down 24% a year, over the last 5 years. This could justify a pessimistic P/E.

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

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).