This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how China Greenland Broad Greenstate Group Company Limited's (HKG:1253) P/E ratio could help you assess the value on offer. China Greenland Broad Greenstate Group has a P/E ratio of 26.63, based on the last twelve months. In other words, at today's prices, investors are paying HK$26.63 for every HK$1 in prior year profit.

View our latest analysis for China Greenland Broad Greenstate Group

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for China Greenland Broad Greenstate Group:

P/E of 26.63 = HK$0.36 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.01 (Based on the trailing twelve months to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Greenland Broad Greenstate Group's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (12.5) for companies in the commercial services industry is lower than China Greenland Broad Greenstate Group's P/E.

Its relatively high P/E ratio indicates that China Greenland Broad Greenstate Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

China Greenland Broad Greenstate Group saw earnings per share decrease by 62% last year. And it has shrunk its earnings per share by 19% per year over the last five years. This growth rate might warrant a below average P/E ratio.

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. 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.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

So What Does China Greenland Broad Greenstate Group's Balance Sheet Tell Us?

Net debt is 33% of China Greenland Broad Greenstate Group's market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On China Greenland Broad Greenstate Group's P/E Ratio

China Greenland Broad Greenstate Group has a P/E of 26.6. That's higher than the average in its market, which is 10.7. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

You might be able to find a better buy than China Greenland Broad Greenstate Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.