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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Yincheng International Holding Co., Ltd.'s (HKG:1902) P/E ratio could help you assess the value on offer. Yincheng International Holding has a price to earnings ratio of 14.5, based on the last twelve months. That is equivalent to an earnings yield of about 6.9%.
View our latest analysis for Yincheng International Holding
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Yincheng International Holding:
P/E of 14.5 = CN¥2.08 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.14 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Does Yincheng International Holding's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Yincheng International Holding has a higher P/E than the average company (6.4) in the real estate industry.
Its relatively high P/E ratio indicates that Yincheng International 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
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Yincheng International Holding's earnings per share fell by 71% in the last twelve months.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.