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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Tingyi (Cayman Islands) Holding Corp.'s (HKG:322), to help you decide if the stock is worth further research. Tingyi (Cayman Islands) Holding has a price to earnings ratio of 26.14, based on the last twelve months. In other words, at today's prices, investors are paying HK$26.14 for every HK$1 in prior year profit.
View 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 = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Tingyi (Cayman Islands) Holding:
P/E of 26.14 = CN¥11.46 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.44 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Notably, Tingyi (Cayman Islands) Holding grew EPS by a whopping 35% in the last year. And its annual EPS growth rate over 3 years is 14%. I'd therefore be a little surprised if its P/E ratio was not relatively high.
How Does Tingyi (Cayman Islands) Holding's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Tingyi (Cayman Islands) Holding has a higher P/E than the average company (15.8) in the food industry.
That means that the market expects Tingyi (Cayman Islands) Holding will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.