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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Jinhui Shipping and Transportation Limited's (OB:JIN) P/E ratio and reflect on what it tells us about the company's share price. Jinhui Shipping and Transportation has a P/E ratio of 11.36, based on the last twelve months. That is equivalent to an earnings yield of about 8.8%.

See our latest analysis for Jinhui Shipping and Transportation

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for Jinhui Shipping and Transportation:

P/E of 11.36 = $0.85 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.075 (Based on the year to March 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. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Jinhui Shipping and Transportation increased earnings per share by an impressive 18% over the last twelve months. Unfortunately, earnings per share are down 20% a year, over 5 years.

Does Jinhui Shipping and Transportation Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (10.4) for companies in the shipping industry is lower than Jinhui Shipping and Transportation's P/E.

That means that the market expects Jinhui Shipping and Transportation will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.