In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Sino Biopharmaceutical Limited’s (HKG:1177) P/E ratio and reflect on what it tells us about the company’s share price. Sino Biopharmaceutical has a P/E ratio of 31.04, based on the last twelve months. That means that at current prices, buyers pay HK$31.04 for every HK$1 in trailing yearly profits.
View our latest analysis for Sino Biopharmaceutical
How Do You Calculate Sino Biopharmaceutical’s 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 Sino Biopharmaceutical:
P/E of 31.04 = CN¥6.6 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.21 (Based on the trailing twelve months to June 2018.)
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 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
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. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, Sino Biopharmaceutical grew EPS by a whopping 30% in the last year. And it has bolstered its earnings per share by 21% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does Sino Biopharmaceutical’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (14) for companies in the pharmaceuticals industry is lower than Sino Biopharmaceutical’s P/E.
That means that the market expects Sino Biopharmaceutical will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.