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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at CGN Power Co., Ltd.'s (HKG:1816) P/E ratio and reflect on what it tells us about the company's share price. CGN Power has a price to earnings ratio of 7.97, based on the last twelve months. That means that at current prices, buyers pay HK$7.97 for every HK$1 in trailing yearly profits.
Check out our latest analysis for CGN Power
How Do You Calculate CGN Power's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for CGN Power:
P/E of 7.97 = CNY1.78 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CNY0.22 (Based on the year to September 2019.)
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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does CGN Power's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below CGN Power has a P/E ratio that is fairly close for the average for the renewable energy industry, which is 8.0.
That indicates that the market expects CGN Power will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
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. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
It's nice to see that CGN Power grew EPS by a stonking 36% in the last year. And it has improved its earnings per share by 12% per year over the last three years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.