In This Article:
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 Financial Services Holdings Limited's (HKG:605) P/E ratio to inform your assessment of the investment opportunity. China Financial Services Holdings has a price to earnings ratio of 7.39, based on the last twelve months. That is equivalent to an earnings yield of about 14%.
View our latest analysis for China Financial Services Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for China Financial Services Holdings:
P/E of 7.39 = HK$0.47 ÷ HK$0.063 (Based on the year 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does China Financial Services Holdings's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that China Financial Services Holdings has a P/E ratio that is roughly in line with the consumer finance industry average (7).
That indicates that the market expects China Financial Services Holdings will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
China Financial Services Holdings's earnings per share fell by 11% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 4.1% annually. This could justify a pessimistic P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
China Financial Services Holdings's Balance Sheet
Net debt totals 70% of China Financial Services Holdings's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.