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 CGN New Energy Holdings Co., Ltd.'s (HKG:1811) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, CGN New Energy Holdings's P/E ratio is 5.77. That is equivalent to an earnings yield of about 17%.
See our latest analysis for CGN New Energy 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 CGN New Energy Holdings:
P/E of 5.77 = $0.12 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.021 (Based on the trailing twelve months to December 2018.)
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 isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does CGN New Energy 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. If you look at the image below, you can see CGN New Energy Holdings has a lower P/E than the average (8.4) in the renewable energy industry classification.
This suggests that market participants think CGN New Energy Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, 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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
It's nice to see that CGN New Energy Holdings grew EPS by a stonking 43% in the last year. And earnings per share have improved by 2.7% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio. Unfortunately, earnings per share are down 5.3% a year, over 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.