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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 look at Fosun International Limited’s (HKG:656) P/E ratio and reflect on what it tells us about the company’s share price. Fosun International has a P/E ratio of 6.15, based on the last twelve months. That means that at current prices, buyers pay HK$6.15 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Fosun International
How Do I Calculate Fosun International’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Fosun International:
P/E of 6.15 = CN¥10.16 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥1.65 (Based on the year to June 2018.)
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 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Most would be impressed by Fosun International earnings growth of 21% in the last year. And its annual EPS growth rate over 5 years is 15%. With that performance, you might expect an above average P/E ratio.
How Does Fosun International’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (7.5) for companies in the industrials industry is higher than Fosun International’s P/E.
Its relatively low P/E ratio indicates that Fosun International shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.