The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Yihai International Holding Ltd.'s (HKG:1579) P/E ratio and reflect on what it tells us about the company's share price. Yihai International Holding has a P/E ratio of 68.75, based on the last twelve months. That is equivalent to an earnings yield of about 1.5%.

See our latest analysis for Yihai International Holding

How Do I Calculate Yihai International Holding's Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for Yihai International Holding:

P/E of 68.75 = HK$42.79 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.62 (Based on the trailing twelve months to June 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.

Does Yihai International Holding Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (15.9) for companies in the food industry is a lot lower than Yihai International Holding's P/E.

That means that the market expects Yihai International Holding will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

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. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Yihai International Holding's earnings made like a rocket, taking off 61% last year. The cherry on top is that the five year growth rate was an impressive 41% per year. With that kind of growth rate we would generally expect a high P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).