In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Chongqing Rural Commercial Bank Co., Ltd.'s (HKG:3618) P/E ratio and reflect on what it tells us about the company's share price. Chongqing Rural Commercial Bank has a price to earnings ratio of 3.88, based on the last twelve months. That is equivalent to an earnings yield of about 26%.
See our latest analysis for Chongqing Rural Commercial Bank
How Do I Calculate Chongqing Rural Commercial Bank's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Chongqing Rural Commercial Bank:
P/E of 3.88 = CN¥3.52 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.91 (Based on the trailing twelve months to December 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. 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 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Chongqing Rural Commercial Bank shrunk earnings per share by 3.8% last year. But it has grown its earnings per share by 7.1% per year over the last five years.
Does Chongqing Rural Commercial Bank Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Chongqing Rural Commercial Bank has a lower P/E than the average (5.9) P/E for companies in the banks industry.
Chongqing Rural Commercial Bank'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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.