This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how ANTA Sports Products Limited's (HKG:2020) P/E ratio could help you assess the value on offer. ANTA Sports Products has a price to earnings ratio of 30.14, based on the last twelve months. That is equivalent to an earnings yield of about 3.3%.

See our latest analysis for ANTA Sports Products

How Do I Calculate ANTA Sports Products's Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for ANTA Sports Products:

P/E of 30.14 = CN¥59.882 ÷ CN¥1.987 (Based on the trailing twelve months to December 2019.)

(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)

Is A High P/E 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 ANTA Sports Products Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that ANTA Sports Products has a significantly higher P/E than the average (7.2) P/E for companies in the luxury industry.

That means that the market expects ANTA Sports Products 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.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

It's nice to see that ANTA Sports Products grew EPS by a stonking 30% in the last year. And its annual EPS growth rate over 5 years is 24%. I'd therefore be a little surprised if its P/E ratio was not relatively high.