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 Shanghai Industrial Holdings Limited's (HKG:363), to help you decide if the stock is worth further research. Shanghai Industrial Holdings has a P/E ratio of 4.92, based on the last twelve months. In other words, at today's prices, investors are paying HK$4.92 for every HK$1 in prior year profit.
View our latest analysis for Shanghai Industrial Holdings
How Do I Calculate Shanghai Industrial Holdings's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Shanghai Industrial Holdings:
P/E of 4.92 = HK$15.20 ÷ HK$3.09 (Based on the year 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. 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 Shanghai Industrial Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Shanghai Industrial Holdings has a lower P/E than the average (6.6) P/E for companies in the industrials industry.
Shanghai Industrial Holdings'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. 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Shanghai Industrial Holdings shrunk earnings per share by 4.0% last year. But it has grown its earnings per share by 2.4% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.