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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Tingyi (Cayman Islands) Holding Corp.'s (HKG:322) P/E ratio to inform your assessment of the investment opportunity. Tingyi (Cayman Islands) Holding has a price to earnings ratio of 28.73, based on the last twelve months. That means that at current prices, buyers pay HK$28.73 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Tingyi (Cayman Islands) Holding
How Do I Calculate Tingyi (Cayman Islands) Holding's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Tingyi (Cayman Islands) Holding:
P/E of 28.73 = CNY13.60 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CNY0.47 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Tingyi (Cayman Islands) Holding Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Tingyi (Cayman Islands) Holding has a higher P/E than the average (15.7) P/E for companies in the food industry.
That means that the market expects Tingyi (Cayman Islands) Holding will outperform other companies in its industry. 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
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Tingyi (Cayman Islands) Holding saw earnings per share improve by -9.5% last year. And earnings per share have improved by 47% annually, over the last three years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.