In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to E-House (China) Enterprise Holdings Limited's (HKG:2048), to help you decide if the stock is worth further research. E-House (China) Enterprise Holdings has a price to earnings ratio of 8.90, based on the last twelve months. That means that at current prices, buyers pay HK$8.90 for every HK$1 in trailing yearly profits.
Check out our latest analysis for E-House (China) Enterprise Holdings
How Do I Calculate E-House (China) Enterprise Holdings's Price To Earnings 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 E-House (China) Enterprise Holdings:
P/E of 8.90 = HK$6.52 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.73 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Does E-House (China) Enterprise Holdings Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (6.6) for companies in the real estate industry is lower than E-House (China) Enterprise Holdings's P/E.
That means that the market expects E-House (China) Enterprise Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
E-House (China) Enterprise Holdings saw earnings per share decrease by 24% last year. But it has grown its earnings per share by 35% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.