The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use China VAST Industrial Urban Development Company Limited's (HKG:6166) P/E ratio to inform your assessment of the investment opportunity. What is China VAST Industrial Urban Development's P/E ratio? Well, based on the last twelve months it is 4.24. That means that at current prices, buyers pay HK$4.24 for every HK$1 in trailing yearly profits.
Check out our latest analysis for China VAST Industrial Urban Development
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for China VAST Industrial Urban Development:
P/E of 4.24 = CN¥2.81 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.66 (Based on the trailing twelve months to June 2019.)
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 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 China VAST Industrial Urban Development'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. The image below shows that China VAST Industrial Urban Development has a lower P/E than the average (6.1) P/E for companies in the real estate industry.
China VAST Industrial Urban Development's P/E tells us that market participants think it will not fare as well as its peers in the same 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.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
China VAST Industrial Urban Development saw earnings per share decrease by 20% last year. But over the longer term (5 years) earnings per share have increased by 4.7%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).