This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to CSSC (Hong Kong) Shipping Company Limited's (HKG:3877), to help you decide if the stock is worth further research. CSSC (Hong Kong) Shipping has a P/E ratio of 6.99, based on the last twelve months. That is equivalent to an earnings yield of about 14.3%.

See our latest analysis for CSSC (Hong Kong) Shipping

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for CSSC (Hong Kong) Shipping:

P/E of 6.99 = HK$1.130 ÷ HK$0.162 (Based on the year to June 2019.)

(Note: the above calculation results may not be precise due to rounding.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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'.

Does CSSC (Hong Kong) Shipping Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that CSSC (Hong Kong) Shipping has a P/E ratio that is roughly in line with the diversified financial industry average (7.5).

Its P/E ratio suggests that CSSC (Hong Kong) Shipping shareholders think that in the future it will perform about the same as other companies in its industry classification. 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. 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.

CSSC (Hong Kong) Shipping increased earnings per share by an impressive 15% over the last twelve months. And earnings per share have improved by 4.9% annually, over the last five years. This could arguably justify a relatively high P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.