In This Article:
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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 SSY Group Limited's (HKG:2005), to help you decide if the stock is worth further research. What is SSY Group's P/E ratio? Well, based on the last twelve months it is 23.19. That means that at current prices, buyers pay HK$23.19 for every HK$1 in trailing yearly profits.
Check out our latest analysis for SSY Group
How Do You Calculate SSY Group's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for SSY Group:
P/E of 23.19 = HK$7.06 ÷ HK$0.30 (Based on the year to December 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. 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.
Notably, SSY Group grew EPS by a whopping 30% in the last year. And earnings per share have improved by 19% annually, over the last five years. So we'd generally expect it to have a relatively high P/E ratio.
Does SSY 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. The image below shows that SSY Group has a higher P/E than the average (12.8) P/E for companies in the pharmaceuticals industry.
That means that the market expects SSY Group will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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).