This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Red Star Macalline Group Corporation Ltd.'s (HKG:1528) P/E ratio could help you assess the value on offer. Red Star Macalline Group has a P/E ratio of 5.09, based on the last twelve months. In other words, at today's prices, investors are paying HK$5.09 for every HK$1 in prior year profit.

View our latest analysis for Red Star Macalline Group

How Do I Calculate Red Star Macalline Group's 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 Red Star Macalline Group:

P/E of 5.09 = HK$5.93 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$1.16 (Based on the year to September 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 HK$1 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.

Does Red Star Macalline Group Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Red Star Macalline Group has a lower P/E than the average (6.9) P/E for companies in the real estate industry.

This suggests that market participants think Red Star Macalline Group will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Red Star Macalline Group shrunk earnings per share by 19% over the last year. But EPS is up 8.9% over the last 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).