The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at CIMC Vehicle (Group) Co., Ltd.'s (HKG:1839) P/E ratio and reflect on what it tells us about the company's share price. What is CIMC Vehicle (Group)'s P/E ratio? Well, based on the last twelve months it is 7.12. That is equivalent to an earnings yield of about 14.0%.

View our latest analysis for CIMC Vehicle (Group)

How Do I Calculate CIMC Vehicle (Group)'s Price To Earnings Ratio?

The formula for P/E is:

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

Or for CIMC Vehicle (Group):

P/E of 7.12 = CN¥5.356 ÷ CN¥0.752 (Based on the year to December 2019.)

(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each CN¥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 Does CIMC Vehicle (Group)'s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see CIMC Vehicle (Group) has a lower P/E than the average (9.2) in the machinery industry classification.

This suggests that market participants think CIMC Vehicle (Group) will underperform other companies in its industry. Since the market seems unimpressed with CIMC Vehicle (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

Earnings growth rates have a big influence on P/E ratios. 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.

CIMC Vehicle (Group) saw earnings per share decrease by 1.3% last year. But EPS is up 9.1% over the last 5 years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.