In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Jacobson Pharma Corporation Limited’s (HKG:2633) P/E ratio and reflect on what it tells us about the company’s share price. Jacobson Pharma has a P/E ratio of 14.09, based on the last twelve months. That means that at current prices, buyers pay HK$14.09 for every HK$1 in trailing yearly profits.
See our latest analysis for Jacobson Pharma
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Jacobson Pharma:
P/E of 14.09 = HK$1.57 ÷ HK$0.11 (Based on the year to March 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Jacobson Pharma shrunk earnings per share by 2.2% last year. And EPS is down 58% a year, over the last 5 years. So we might expect a relatively low P/E.
How Does Jacobson Pharma’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 (14.1) for companies in the pharmaceuticals industry is roughly the same as Jacobson Pharma’s P/E.
Its P/E ratio suggests that Jacobson Pharma shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Jacobson Pharma actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. 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).