The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Q Technology (Group) Company Limited's (HKG:1478) P/E ratio to inform your assessment of the investment opportunity. What is Q Technology (Group)'s P/E ratio? Well, based on the last twelve months it is 40.61. That means that at current prices, buyers pay HK$40.61 for every HK$1 in trailing yearly profits.

See our latest analysis for Q Technology (Group)

How Do You Calculate Q Technology (Group)'s P/E Ratio?

The formula for P/E is:

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

Or for Q Technology (Group):

P/E of 40.61 = HK$8.83 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.22 (Based on the trailing twelve months to June 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Q Technology (Group)'s P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Q Technology (Group) has a much higher P/E than the average company (12.8) in the consumer durables industry.

Its relatively high P/E ratio indicates that Q Technology (Group) shareholders think it will perform better than other companies in its industry classification. 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

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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Notably, Q Technology (Group) grew EPS by a whopping 32% in the last year. And its annual EPS growth rate over 3 years is 23%. With that performance, I would expect it to have an above average P/E ratio. But earnings per share are down 12% per year over the last five 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.