In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Brilliance China Automotive Holdings Limited’s (HKG:1114) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Brilliance China Automotive Holdings’s P/E ratio is 5.33. That corresponds to an earnings yield of approximately 19%.
See our latest analysis for Brilliance China Automotive Holdings
How Do You Calculate Brilliance China Automotive Holdings’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Brilliance China Automotive Holdings:
P/E of 5.33 = CN¥5.95 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥1.12 (Based on the trailing twelve months to June 2018.)
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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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.
Brilliance China Automotive Holdings increased earnings per share by a whopping 34% last year. And earnings per share have improved by 3.7% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does Brilliance China Automotive Holdings’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Brilliance China Automotive Holdings has a lower P/E than the average (8.3) in the auto industry classification.
This suggests that market participants think Brilliance China Automotive 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.
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. 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.