The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how China Wood Optimization (Holding) Limited's (HKG:1885) P/E ratio could help you assess the value on offer. China Wood Optimization (Holding) has a price to earnings ratio of 30.52, based on the last twelve months. In other words, at today's prices, investors are paying HK$30.52 for every HK$1 in prior year profit.
View our latest analysis for China Wood Optimization (Holding)
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 China Wood Optimization (Holding):
P/E of 30.52 = HK$2.19 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.07 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does China Wood Optimization (Holding)'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, China Wood Optimization (Holding) has a higher P/E than the average company (13.5) in the forestry industry.
Its relatively high P/E ratio indicates that China Wood Optimization (Holding) shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
It's nice to see that China Wood Optimization (Holding) grew EPS by a stonking 40% in the last year. Unfortunately, earnings per share are down 6.3% a year, over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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.