This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Binjiang Services Group Co. Ltd.'s (HKG:3316) P/E ratio to inform your assessment of the investment opportunity. Binjiang Services Group has a price to earnings ratio of 16.12, based on the last twelve months. That is equivalent to an earnings yield of about 6.2%.

Check out our latest analysis for Binjiang Services Group

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Binjiang Services Group:

P/E of 16.12 = HK$6.06 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.38 (Based on the year to June 2019.)

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 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.

Does Binjiang Services Group Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Binjiang Services Group has a higher P/E than the average (12.3) P/E for companies in the commercial services industry.

That means that the market expects Binjiang Services Group will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Most would be impressed by Binjiang Services Group earnings growth of 18% in the last year. And earnings per share have improved by 46% annually, over the last five years. So one might expect an above average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.