In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Crystal International Group Limited’s (HKG:2232) P/E ratio could help you assess the value on offer. Crystal International Group has a P/E ratio of 11.6, based on the last twelve months. That corresponds to an earnings yield of approximately 8.6%.
Check out our latest analysis for Crystal International Group
How Do You Calculate Crystal International Group’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Crystal International Group:
P/E of 11.6 = $0.65 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.056 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Crystal International Group shrunk earnings per share by 7.3% last year. But over the longer term (5 years) earnings per share have increased by 17%.
How Does Crystal International Group’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Crystal International Group has a higher P/E than the average (10.1) P/E for companies in the luxury industry.
That means that the market expects Crystal International Group will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. 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
Don’t forget that the P/E ratio considers market capitalization. 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.