The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use China Risun Group Limited's (HKG:1907) P/E ratio to inform your assessment of the investment opportunity. China Risun Group has a P/E ratio of 3.74, based on the last twelve months. That means that at current prices, buyers pay HK$3.74 for every HK$1 in trailing yearly profits.

Check out our latest analysis for China Risun Group

How Do You Calculate China Risun Group's 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 China Risun Group:

P/E of 3.74 = CNY2.32 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CNY0.62 (Based on the trailing twelve months to June 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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 Does China Risun Group's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see China Risun Group has a lower P/E than the average (7.2) in the chemicals industry classification.

China Risun Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

China Risun Group increased earnings per share by a whopping 46% last year.

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

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.