This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Beijing Chunlizhengda Medical Instruments Co Ltd’s (HKG:1858) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Beijing Chunlizhengda Medical Instruments’s P/E ratio is 18.7. That is equivalent to an earnings yield of about 5.3%.

See our latest analysis for Beijing Chunlizhengda Medical Instruments

How Do You Calculate A 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 Beijing Chunlizhengda Medical Instruments:

P/E of 18.7 = CN¥22.58 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥1.21 (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 isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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.

It’s nice to see that Beijing Chunlizhengda Medical Instruments grew EPS by a stonking 33% in the last year. And earnings per share have improved by 12% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.

How Does Beijing Chunlizhengda Medical Instruments’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (21) for companies in the medical equipment industry is higher than Beijing Chunlizhengda Medical Instruments’s P/E.

Beijing Chunlizhengda Medical Instruments’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Beijing Chunlizhengda Medical Instruments, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.