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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Jiyi Household International Holdings Limited's (HKG:1495) P/E ratio to inform your assessment of the investment opportunity. Jiyi Household International Holdings has a price to earnings ratio of 33.92, based on the last twelve months. That is equivalent to an earnings yield of about 2.9%.
See our latest analysis for Jiyi Household International Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Jiyi Household International Holdings:
P/E of 33.92 = CN¥0.641 ÷ CN¥0.019 (Based on the year to December 2019.)
(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Jiyi Household International Holdings 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. You can see in the image below that the average P/E (8.1) for companies in the trade distributors industry is a lot lower than Jiyi Household International Holdings's P/E.
Its relatively high P/E ratio indicates that Jiyi Household International Holdings shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and 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. Then, a higher P/E might scare off shareholders, pushing the share price down.
Jiyi Household International Holdings's earnings per share fell by 22% in the last twelve months. And EPS is down 34% a year, over the last 5 years. This might lead to muted expectations.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.