In This Article:
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 Chinese People Holdings Company Limited’s (HKG:681) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Chinese People Holdings’s P/E ratio is 2.76. That corresponds to an earnings yield of approximately 36%.
View our latest analysis for Chinese People Holdings
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 Chinese People Holdings:
P/E of 2.76 = CN¥0.078 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.028 (Based on the year to March 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Chinese People Holdings increased earnings per share by a whopping 29% last year. And its annual EPS growth rate over 5 years is 41%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Chinese People 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 Chinese People Holdings has a lower P/E than the average (11.8) P/E for companies in the oil and gas industry.
Its relatively low P/E ratio indicates that Chinese People Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.