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 Meilleure Health International Industry Group Limited's (HKG:2327), to help you decide if the stock is worth further research. What is Meilleure Health International Industry Group's P/E ratio? Well, based on the last twelve months it is 17.92. That corresponds to an earnings yield of approximately 5.6%.
See our latest analysis for Meilleure Health International Industry Group
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Meilleure Health International Industry Group:
P/E of 17.92 = HK$0.375 ÷ HK$0.021 (Based on the trailing twelve months to June 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Meilleure Health International Industry Group's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (8.2) for companies in the trade distributors industry is lower than Meilleure Health International Industry Group's P/E.
That means that the market expects Meilleure Health International Industry Group will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Meilleure Health International Industry Group shrunk earnings per share by 7.5% last year. But over the longer term (3 years), earnings per share have increased by 60%. And EPS is down 5.0% a year, over the last 5 years. So you wouldn't expect a very high P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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).