This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at PW Medtech Group Limited's (HKG:1358) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, PW Medtech Group has a P/E ratio of 13.96. That means that at current prices, buyers pay HK$13.96 for every HK$1 in trailing yearly profits.

See our latest analysis for PW Medtech Group

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for PW Medtech Group:

P/E of 13.96 = HK$1.21 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.09 (Based on the year to June 2019.)

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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Does PW Medtech Group Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that PW Medtech Group has a lower P/E than the average (16.7) P/E for companies in the medical equipment industry.

PW Medtech Group's P/E tells us that market participants think it will not fare as well as its peers in the same 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

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

PW Medtech Group's earnings made like a rocket, taking off 405% last year. Unfortunately, earnings per share are down 9.9% 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.