This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Beijing Capital Grand Limited’s (HKG:1329) P/E ratio and reflect on what it tells us about the company’s share price. Beijing Capital Grand has a P/E ratio of 28.05, based on the last twelve months. That means that at current prices, buyers pay HK$28.05 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Beijing Capital Grand
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Beijing Capital Grand:
P/E of 28.05 = CN¥1.29 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.046 (Based on the year to June 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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 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.
Beijing Capital Grand’s earnings per share fell by 22% in the last twelve months. But EPS is up 4.3% over the last 5 years. And it has shrunk its earnings per share by 112% per year over the last three years. This growth rate might warrant a low P/E ratio. This might lead to low expectations.
How Does Beijing Capital Grand’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 (5.3) for companies in the real estate industry is a lot lower than Beijing Capital Grand’s P/E.
That means that the market expects Beijing Capital Grand will outperform other companies in its industry. 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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.