In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Extrawell Pharmaceutical Holdings Limited’s (HKG:858) P/E ratio could help you assess the value on offer. Based on the last twelve months, Extrawell Pharmaceutical Holdings’s P/E ratio is 6.44. That is equivalent to an earnings yield of about 16%.
See our latest analysis for Extrawell Pharmaceutical Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Extrawell Pharmaceutical Holdings:
P/E of 6.44 = HK$0.10 ÷ HK$0.016 (Based on the year to September 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. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Extrawell Pharmaceutical Holdings increased earnings per share by an impressive 14% over the last twelve months. And earnings per share have improved by 29% annually, over the last five years. This could arguably justify a relatively high P/E ratio.
How Does Extrawell Pharmaceutical Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Extrawell Pharmaceutical Holdings has a lower P/E than the average (13.2) P/E for companies in the pharmaceuticals industry.
This suggests that market participants think Extrawell Pharmaceutical Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and 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. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.