This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Shanghai Kindly Medical Instruments Co., Ltd.'s (HKG:1501) P/E ratio to inform your assessment of the investment opportunity. Shanghai Kindly Medical Instruments has a P/E ratio of 42.56, based on the last twelve months. That is equivalent to an earnings yield of about 2.3%.

View our latest analysis for Shanghai Kindly Medical Instruments

How Do I Calculate A 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 Shanghai Kindly Medical Instruments:

P/E of 42.56 = CN¥33.470 ÷ CN¥0.786 (Based on the trailing twelve months 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 Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Does Shanghai Kindly Medical Instruments's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (33.8) for companies in the medical equipment industry is lower than Shanghai Kindly Medical Instruments's P/E.

Its relatively high P/E ratio indicates that Shanghai Kindly Medical Instruments shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Most would be impressed by Shanghai Kindly Medical Instruments earnings growth of 16% in the last year. And it has bolstered its earnings per share by 14% per year over the last five years. So one might expect an above average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.