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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 show how you can use Vincent Medical Holdings Limited’s (HKG:1612) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Vincent Medical Holdings’s P/E ratio is 29.81. That means that at current prices, buyers pay HK$29.81 for every HK$1 in trailing yearly profits.

View our latest analysis for Vincent Medical Holdings

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Vincent Medical Holdings:

P/E of 29.81 = HK$0.64 ÷ HK$0.021 (Based on the year to June 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

Earnings growth rates have a big influence on P/E ratios. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Vincent Medical Holdings shrunk earnings per share by 54% over the last year.

How Does Vincent Medical Holdings’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, Vincent Medical Holdings has a higher P/E than the average company (19.5) in the medical equipment industry.

Its relatively high P/E ratio indicates that Vincent Medical Holdings shareholders think it will perform better than other companies in its industry classification. 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.

Remember: P/E Ratios Don’t Consider The Balance Sheet

The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.