In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Green Cross Health Limited’s (NZSE:GXH) P/E ratio and reflect on what it tells us about the company’s share price. Green Cross Health has a price to earnings ratio of 10.24, based on the last twelve months. That means that at current prices, buyers pay NZ$10.24 for every NZ$1 in trailing yearly profits.
See our latest analysis for Green Cross Health
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Green Cross Health:
P/E of 10.24 = NZ$1.16 ÷ NZ$0.11 (Based on the year to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each NZ$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
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Green Cross Health’s earnings per share fell by 12% in the last twelve months. But EPS is up 2.3% over the last 5 years. And EPS is down 2.4% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.
How Does Green Cross Health’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Green Cross Health has a lower P/E than the average (16.1) in the consumer retailing industry classification.
Green Cross Health’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.