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 China Art Financial Holdings Limited's (HKG:1572) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, China Art Financial Holdings has a P/E ratio of 11.7. That corresponds to an earnings yield of approximately 8.5%.
See our latest analysis for China Art Financial 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 China Art Financial Holdings:
P/E of 11.7 = CN¥0.93 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.080 (Based on the year to June 2019.)
Is A High Price-to-Earnings 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.
Does China Art Financial Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (8.7) for companies in the consumer finance industry is lower than China Art Financial Holdings's P/E.
Its relatively high P/E ratio indicates that China Art Financial Holdings shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
China Art Financial Holdings saw earnings per share decrease by 25% last year. But it has grown its earnings per share by 13% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.