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 Sinopec Shanghai Petrochemical Company Limited’s (HKG:338) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Sinopec Shanghai Petrochemical’s P/E ratio is 5.2. That means that at current prices, buyers pay HK$5.2 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Sinopec Shanghai Petrochemical
How Do You Calculate Sinopec Shanghai Petrochemical’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Sinopec Shanghai Petrochemical:
P/E of 5.2 = CN¥3.22 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.62 (Based on the trailing twelve months to September 2018.)
Is A High P/E 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 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s great to see that Sinopec Shanghai Petrochemical grew EPS by 12% in the last year. And earnings per share have improved by 39% annually, over the last five years. So one might expect an above average P/E ratio.
How Does Sinopec Shanghai Petrochemical’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 Sinopec Shanghai Petrochemical has a lower P/E than the average (7.9) in the chemicals industry classification.
This suggests that market participants think Sinopec Shanghai Petrochemical will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.