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 look at Beijing Enterprises Holdings Limited's (HKG:392) P/E ratio and reflect on what it tells us about the company's share price. Beijing Enterprises Holdings has a P/E ratio of 5.34, based on the last twelve months. That corresponds to an earnings yield of approximately 18.7%.
View our latest analysis for Beijing Enterprises Holdings
How Do I Calculate Beijing Enterprises Holdings's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Beijing Enterprises Holdings:
P/E of 5.34 = HKD34.10 ÷ HKD6.38 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Beijing Enterprises Holdings's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (16.5) for companies in the gas utilities industry is higher than Beijing Enterprises Holdings's P/E.
This suggests that market participants think Beijing Enterprises Holdings will underperform other companies in its industry. Since the market seems unimpressed with Beijing Enterprises Holdings, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Beijing Enterprises Holdings's earnings per share grew by -9.3% in the last twelve months. And it has bolstered its earnings per share by 9.6% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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.