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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how China Shenhua Energy Company Limited’s (HKG:1088) P/E ratio could help you assess the value on offer. China Shenhua Energy has a P/E ratio of 7.06, based on the last twelve months. In other words, at today’s prices, investors are paying HK$7.06 for every HK$1 in prior year profit.

View our latest analysis for China Shenhua Energy

How Do You Calculate China Shenhua Energy’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 Shenhua Energy:

P/E of 7.06 = CN¥16.47 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥2.33 (Based on the trailing twelve months to September 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. 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

P/E ratios primarily reflect market expectations around earnings growth rates. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

China Shenhua Energy’s earnings per share grew by -3.5% in the last twelve months. And it has improved its earnings per share by 37% per year over the last three years.

How Does China Shenhua Energy’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 Shenhua Energy has a lower P/E than the average (11.5) in the oil and gas industry classification.

Its relatively low P/E ratio indicates that China Shenhua Energy shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with China Shenhua Energy, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.