In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to eprint Group Limited's (HKG:1884), to help you decide if the stock is worth further research. eprint Group has a P/E ratio of 9.16, based on the last twelve months. That means that at current prices, buyers pay HK$9.16 for every HK$1 in trailing yearly profits.
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Check out our latest analysis for eprint Group
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 eprint Group:
P/E of 9.16 = HK$0.39 ÷ HK$0.043 (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 HK$1 the company has earned over the last year. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
eprint Group saw earnings per share improve by -8.6% last year. Unfortunately, earnings per share are down 13% a year, over 5 years.
How Does eprint Group's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see eprint Group has a lower P/E than the average (13.8) in the commercial services industry classification.
This suggests that market participants think eprint Group will underperform other companies in its industry. Since the market seems unimpressed with eprint Group, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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).