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 SCUD Group Limited's (HKG:1399) P/E ratio and reflect on what it tells us about the company's share price. What is SCUD Group's P/E ratio? Well, based on the last twelve months it is 4.54. That is equivalent to an earnings yield of about 22.0%.
See our latest analysis for SCUD Group
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 SCUD Group:
P/E of 4.54 = CN¥0.219 ÷ CN¥0.048 (Based on the year to December 2019.)
(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each CN¥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 SCUD Group Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (9.0) for companies in the electrical industry is higher than SCUD Group's P/E.
This suggests that market participants think SCUD Group will underperform other companies in its industry. Since the market seems unimpressed with SCUD Group, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
SCUD Group's earnings per share fell by 44% in the last twelve months.
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. 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.