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 Xiangxing International Holding Limited’s (HKG:8157) P/E ratio to inform your assessment of the investment opportunity. Xiangxing International Holding has a P/E ratio of 18.51, based on the last twelve months. That is equivalent to an earnings yield of about 5.4%.
See our latest analysis for Xiangxing International Holding
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 Xiangxing International Holding:
P/E of 18.51 = CN¥0.27 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.014 (Based on the year to September 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, Xiangxing International Holding grew EPS by a whopping 45% in the last year.
How Does Xiangxing International Holding’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, Xiangxing International Holding has a higher P/E than the average company (12.3) in the shipping industry.
Its relatively high P/E ratio indicates that Xiangxing International Holding shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.