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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 look at IPE Group Limited's (HKG:929) P/E ratio and reflect on what it tells us about the company's share price. IPE Group has a price to earnings ratio of 11.35, based on the last twelve months. That is equivalent to an earnings yield of about 8.8%.
Check out our latest analysis for IPE Group
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for IPE Group:
P/E of 11.35 = HK$0.92 ÷ HK$0.081 (Based on the year to December 2018.)
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.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. 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.
IPE Group shrunk earnings per share by 26% over the last year. But over the longer term (5 years) earnings per share have increased by 110%. And it has shrunk its earnings per share by 4.3% per year over the last three years. This growth rate might warrant a low P/E ratio.
Does IPE Group Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, IPE Group has a higher P/E than the average company (9.1) in the machinery industry.
That means that the market expects IPE Group will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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 investing in growth. That means taking on debt (or spending its cash).