In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Shandong Xinhua Pharmaceutical Company Limited’s (HKG:719) P/E ratio to inform your assessment of the investment opportunity. Shandong Xinhua Pharmaceutical has a price to earnings ratio of 10.26, based on the last twelve months. That is equivalent to an earnings yield of about 9.8%.
Check out our latest analysis for Shandong Xinhua Pharmaceutical
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 Shandong Xinhua Pharmaceutical:
P/E of 10.26 = CN¥3.77 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.37 (Based on the year to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Shandong Xinhua Pharmaceutical saw earnings per share improve by -7.1% last year. And its annual EPS growth rate over 5 years is 38%.
How Does Shandong Xinhua Pharmaceutical’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Shandong Xinhua Pharmaceutical has a lower P/E than the average (14) P/E for companies in the pharmaceuticals industry.
Its relatively low P/E ratio indicates that Shandong Xinhua Pharmaceutical shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Shandong Xinhua Pharmaceutical, 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.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.