In This Article:
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 Wisdom Education International Holdings Company Limited’s (HKG:6068) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Wisdom Education International Holdings’s P/E ratio is 18.44. That means that at current prices, buyers pay HK$18.44 for every HK$1 in trailing yearly profits.
See our latest analysis for Wisdom Education International Holdings
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 Wisdom Education International Holdings:
P/E of 18.44 = CN¥2.81 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.15 (Based on the trailing twelve months to August 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 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
If earnings fall then in the future the ‘E’ will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Notably, Wisdom Education International Holdings grew EPS by a whopping 38% in the last year. Unfortunately, earnings per share are down 71% a year, over 5 years.
How Does Wisdom Education International Holdings’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below Wisdom Education International Holdings has a P/E ratio that is fairly close for the average for the consumer services industry, which is 18.5.
That indicates that the market expects Wisdom Education International Holdings will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.