This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how China Overseas Land & Investment Limited's (HKG:688) P/E ratio could help you assess the value on offer. China Overseas Land & Investment has a price to earnings ratio of 6.05, based on the last twelve months. In other words, at today's prices, investors are paying HK$6.05 for every HK$1 in prior year profit.

Check out our latest analysis for China Overseas Land & Investment

How Do You Calculate China Overseas Land & Investment's P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for China Overseas Land & Investment:

P/E of 6.05 = HK$25.75 ÷ HK$4.26 (Based on the trailing twelve months to June 2019.)

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. 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 Does China Overseas Land & Investment's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that China Overseas Land & Investment has a P/E ratio that is roughly in line with the real estate industry average (6.1).

That indicates that the market expects China Overseas Land & Investment will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

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. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

China Overseas Land & Investment increased earnings per share by an impressive 10% over the last twelve months. And its annual EPS growth rate over 5 years is 6.3%. With that performance, you might expect an above average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.