This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how BBI Life Sciences Corporation’s (HKG:1035) P/E ratio could help you assess the value on offer. BBI Life Sciences has a P/E ratio of 17.15, based on the last twelve months. In other words, at today’s prices, investors are paying HK$17.15 for every HK$1 in prior year profit.
Check out our latest analysis for BBI Life Sciences
How Do I Calculate A 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 BBI Life Sciences:
P/E of 17.15 = CN¥2.27 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.13 (Based on the year 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s great to see that BBI Life Sciences grew EPS by 17% in the last year. And its annual EPS growth rate over 5 years is 3.6%. This could arguably justify a relatively high P/E ratio.
How Does BBI Life Sciences’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below BBI Life Sciences has a P/E ratio that is fairly close for the average for the biotechs industry, which is 16.3.
That indicates that the market expects BBI Life Sciences will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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.