In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Rare Earth Magnesium Technology Group Holdings Limited's (HKG:601) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Rare Earth Magnesium Technology Group Holdings has a P/E ratio of 9.19. In other words, at today's prices, investors are paying HK$9.19 for every HK$1 in prior year profit.
See our latest analysis for Rare Earth Magnesium Technology Group Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Rare Earth Magnesium Technology Group Holdings:
P/E of 9.19 = HK$0.32 ÷ HK$0.03 (Based on the year to June 2019.)
Is A High Price-to-Earnings 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Rare Earth Magnesium Technology Group Holdings Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (10.4) for companies in the metals and mining industry is higher than Rare Earth Magnesium Technology Group Holdings's P/E.
This suggests that market participants think Rare Earth Magnesium Technology Group Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. 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.
Most would be impressed by Rare Earth Magnesium Technology Group Holdings earnings growth of 20% in the last year. And it has improved its earnings per share by 484% per year over the last three years. So one might expect an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.