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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Sinopharm Group Co. Ltd.'s (HKG:1099), to help you decide if the stock is worth further research. Sinopharm Group has a P/E ratio of 13.58, based on the last twelve months. That is equivalent to an earnings yield of about 7.4%.
See our latest analysis for Sinopharm Group
How Do You Calculate Sinopharm Group's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Sinopharm Group:
P/E of 13.58 = CN¥26.7 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥1.97 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. 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.
Sinopharm Group increased earnings per share by 4.6% last year. And earnings per share have improved by 17% annually, over the last five years.
Does Sinopharm Group Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Sinopharm Group has a lower P/E than the average (17.2) P/E for companies in the healthcare industry.
This suggests that market participants think Sinopharm 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.
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. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.