In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use China 21st Century Education Group Limited's (HKG:1598) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, China 21st Century Education Group's P/E ratio is 9.43. That means that at current prices, buyers pay HK$9.43 for every HK$1 in trailing yearly profits.
See our latest analysis for China 21st Century Education 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 China 21st Century Education Group:
P/E of 9.43 = CN¥0.70 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.074 (Based on the year to June 2019.)
Is A High P/E 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.'
How Does China 21st Century Education Group's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that China 21st Century Education Group has a lower P/E than the average (16.2) P/E for companies in the consumer services industry.
Its relatively low P/E ratio indicates that China 21st Century Education Group shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
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. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
It's nice to see that China 21st Century Education Group grew EPS by a stonking 41% in the last year.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.