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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Yestar Healthcare Holdings Company Limited's (HKG:2393) P/E ratio to inform your assessment of the investment opportunity. Yestar Healthcare Holdings has a P/E ratio of 10.55, based on the last twelve months. That corresponds to an earnings yield of approximately 9.5%.
Check out our latest analysis for Yestar Healthcare Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Yestar Healthcare Holdings:
P/E of 10.55 = CN¥1.27 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.12 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does Yestar Healthcare Holdings's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Yestar Healthcare Holdings has a lower P/E than the average (14.7) P/E for companies in the medical equipment industry.
Yestar Healthcare Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Yestar Healthcare Holdings maintained roughly steady earnings over the last twelve months. But it has grown its earnings per share by 23% per year over the last five years.
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. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.