The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use China Everbright Greentech Limited’s (HKG:1257) P/E ratio to inform your assessment of the investment opportunity. China Everbright Greentech has a price to earnings ratio of 10.17, based on the last twelve months. That corresponds to an earnings yield of approximately 9.8%.

View our latest analysis for China Everbright Greentech

How Do You Calculate China Everbright Greentech’s P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for China Everbright Greentech:

P/E of 10.17 = HK$5.61 ÷ HK$0.55 (Based on the trailing twelve months to June 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

P/E ratios primarily reflect market expectations around earnings growth rates. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

China Everbright Greentech increased earnings per share by 6.3% last year.

How Does China Everbright Greentech’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 China Everbright Greentech has a P/E ratio that is roughly in line with the renewable energy industry average (10.2).

Its P/E ratio suggests that China Everbright Greentech shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.

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. 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 taking on debt (or spending its remaining cash).