This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use China Resources Cement Holdings Limited's (HKG:1313) P/E ratio to inform your assessment of the investment opportunity. What is China Resources Cement Holdings's P/E ratio? Well, based on the last twelve months it is 8.84. That is equivalent to an earnings yield of about 11.3%.

See our latest analysis for China Resources Cement Holdings

How Do I Calculate China Resources Cement Holdings's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for China Resources Cement Holdings:

P/E of 8.84 = HKD9.72 ÷ HKD1.10 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each HKD1 the company has earned over the last year. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Does China Resources Cement Holdings's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that China Resources Cement Holdings has a higher P/E than the average (5.5) P/E for companies in the basic materials industry.

Its relatively high P/E ratio indicates that China Resources Cement Holdings shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

China Resources Cement Holdings's earnings per share grew by -3.6% in the last twelve months. And its annual EPS growth rate over 5 years is 10%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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.