In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Quanzhou Huixin Micro-Credit Co., Ltd.'s (HKG:1577) P/E ratio could help you assess the value on offer. What is Quanzhou Huixin Micro-Credit's P/E ratio? Well, based on the last twelve months it is 9.25. That means that at current prices, buyers pay HK$9.25 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Quanzhou Huixin Micro-Credit
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Quanzhou Huixin Micro-Credit:
P/E of 9.25 = CNY1.17 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CNY0.13 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each CNY1 the company has earned over the last year. 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 Does Quanzhou Huixin Micro-Credit's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Quanzhou Huixin Micro-Credit has a higher P/E than the average company (6.4) in the consumer finance industry.
Quanzhou Huixin Micro-Credit's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Quanzhou Huixin Micro-Credit shrunk earnings per share by 7.4% last year. But EPS is up 1.3% over the last 5 years. And EPS is down 6.1% a year, over the last 3 years. So you wouldn't expect a very high P/E.
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. 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.