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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to China High Speed Transmission Equipment Group Co., Ltd.'s (HKG:658), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, China High Speed Transmission Equipment Group has a P/E ratio of 29.44. In other words, at today's prices, investors are paying HK$29.44 for every HK$1 in prior year profit.
See our latest analysis for China High Speed Transmission Equipment Group
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for China High Speed Transmission Equipment Group:
P/E of 29.44 = CN¥4.88 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.17 (Based on the trailing twelve months to December 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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
China High Speed Transmission Equipment Group shrunk earnings per share by 74% over the last year. But EPS is up 29% over the last 5 years. And EPS is down 36% a year, over the last 3 years. This could justify a low P/E.
How Does China High Speed Transmission Equipment Group's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (11.4) for companies in the electrical industry is lower than China High Speed Transmission Equipment Group's P/E.
China High Speed Transmission Equipment Group'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 further research is always essential. I often monitor director buying and selling.