In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at China Traditional Chinese Medicine Holdings Co Limited’s (HKG:570) P/E ratio and reflect on what it tells us about the company’s share price. China Traditional Chinese Medicine Holdings has a P/E ratio of 16.26, based on the last twelve months. That means that at current prices, buyers pay HK$16.26 for every HK$1 in trailing yearly profits.
Check out our latest analysis for China Traditional Chinese Medicine Holdings
How Do I Calculate China Traditional Chinese Medicine Holdings’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for China Traditional Chinese Medicine Holdings:
P/E of 16.26 = CN¥4.79 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.29 (Based on the trailing twelve months to June 2018.)
Is A High P/E 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 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
Earnings growth rates have a big influence on P/E ratios. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
China Traditional Chinese Medicine Holdings increased earnings per share by an impressive 22% over the last twelve months. And its annual EPS growth rate over 5 years is 21%. So one might expect an above average P/E ratio.
How Does China Traditional Chinese Medicine 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 Traditional Chinese Medicine Holdings has a higher P/E than the average (13.9) P/E for companies in the pharmaceuticals industry.
China Traditional Chinese Medicine Holdings’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).