In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Trigiant Group Limited's (HKG:1300), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Trigiant Group has a P/E ratio of 5.77. In other words, at today's prices, investors are paying HK$5.77 for every HK$1 in prior year profit.
Check out our latest analysis for Trigiant Group
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Trigiant Group:
P/E of 5.77 = CN¥1.33 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.23 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. 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.'
Does Trigiant 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. The image below shows that Trigiant Group has a lower P/E than the average (13) P/E for companies in the communications industry.
This suggests that market participants think Trigiant Group will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Trigiant Group increased earnings per share by a whopping 29% last year. And it has improved its earnings per share by 19% per year over the last three years. With that performance, I would expect it to have an above average P/E ratio. In contrast, EPS has decreased by 3.9%, annually, over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.