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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use China Electronics Optics Valley Union Holding Company Limited's (HKG:798) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, China Electronics Optics Valley Union Holding's P/E ratio is 6.98. That means that at current prices, buyers pay HK$6.98 for every HK$1 in trailing yearly profits.
See our latest analysis for China Electronics Optics Valley Union Holding
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for China Electronics Optics Valley Union Holding:
P/E of 6.98 = CN¥0.49 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.071 (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. 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
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Most would be impressed by China Electronics Optics Valley Union Holding earnings growth of 23% in the last year. In contrast, EPS has decreased by 9.5%, annually, over 5 years.
How Does China Electronics Optics Valley Union Holding's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, China Electronics Optics Valley Union Holding has a higher P/E than the average company (6.3) in the real estate industry.
That means that the market expects China Electronics Optics Valley Union Holding will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. 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.