What Does Tong Ren Tang Technologies Co. Ltd.’s (HKG:1666) P/E Ratio Tell You?

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Declan Brown

Thu, Jan 31, 2019, 5:24 PM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Tong Ren Tang Technologies Co. Ltd.’s (HKG:1666) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Tong Ren Tang Technologies’s P/E ratio is 16.91. That means that at current prices, buyers pay HK$16.91 for every HK$1 in trailing yearly profits.

Check out our latest analysis for Tong Ren Tang Technologies

How Do You Calculate Tong Ren Tang Technologies’s P/E Ratio?

The formula for P/E is:

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

Or for Tong Ren Tang Technologies:

P/E of 16.91 = CN¥9.02 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.53 (Based on the year to June 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. 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.

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.

Most would be impressed by Tong Ren Tang Technologies earnings growth of 17% in the last year. And earnings per share have improved by 11% annually, over the last five years. This could arguably justify a relatively high P/E ratio.

How Does Tong Ren Tang Technologies’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (13.3) for companies in the pharmaceuticals industry is lower than Tong Ren Tang Technologies’s P/E.

Tong Ren Tang Technologies’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors 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

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.