The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at China Aerospace International Holdings Limited's (HKG:31) P/E ratio and reflect on what it tells us about the company's share price. China Aerospace International Holdings has a price to earnings ratio of 4.01, based on the last twelve months. That corresponds to an earnings yield of approximately 24.9%.
See our latest analysis for China Aerospace International Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for China Aerospace International Holdings:
P/E of 4.01 = HK$0.47 ÷ HK$0.12 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. 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 Does China Aerospace International Holdings'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. We can see in the image below that the average P/E (9.3) for companies in the electronic industry is higher than China Aerospace International Holdings's P/E.
Its relatively low P/E ratio indicates that China Aerospace International Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with China Aerospace International Holdings, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. 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.
China Aerospace International Holdings's earnings per share fell by 19% in the last twelve months. But it has grown its earnings per share by 2.5% per year over the last five years. And it has shrunk its earnings per share by 33% per year over the last three years. This could justify a low P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.