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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how RENHENG Enterprise Holdings Limited's (HKG:3628) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, RENHENG Enterprise Holdings has a P/E ratio of 20.93. That means that at current prices, buyers pay HK$20.93 for every HK$1 in trailing yearly profits.
Check out our latest analysis for RENHENG Enterprise Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for RENHENG Enterprise Holdings:
P/E of 20.93 = HK$0.20 ÷ HK$0.0096 (Based on the year 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does RENHENG Enterprise Holdings Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, RENHENG Enterprise Holdings has a higher P/E than the average company (10.6) in the machinery industry.
RENHENG Enterprise Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, RENHENG Enterprise Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 243% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down 23% per year over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. 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.