In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at China Xinhua Education Group Limited’s (HKG:2779) P/E ratio and reflect on what it tells us about the company’s share price. China Xinhua Education Group has a P/E ratio of 16.52, based on the last twelve months. That means that at current prices, buyers pay HK$16.52 for every HK$1 in trailing yearly profits.
Check out our latest analysis for China Xinhua Education Group
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for China Xinhua Education Group:
P/E of 16.52 = CN¥2.13 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.13 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
China Xinhua Education Group’s earnings per share fell by 12% in the last twelve months.
How Does China Xinhua Education Group’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that China Xinhua Education Group has a lower P/E than the average (21.8) P/E for companies in the consumer services industry.
Its relatively low P/E ratio indicates that China Xinhua Education Group 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. You should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.