In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at China Resources Pharmaceutical Group Limited’s (HKG:3320) P/E ratio and reflect on what it tells us about the company’s share price. China Resources Pharmaceutical Group has a P/E ratio of 18.94, based on the last twelve months. In other words, at today’s prices, investors are paying HK$18.94 for every HK$1 in prior year profit.
View our latest analysis for China Resources Pharmaceutical Group
How Do You Calculate China Resources Pharmaceutical Group’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for China Resources Pharmaceutical Group:
P/E of 18.94 = HK$11.82 ÷ HK$0.62 (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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
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. Earnings growth means that in the future the ‘E’ will be higher. 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 Resources Pharmaceutical Group increased earnings per share by an impressive 20% over the last twelve months. Unfortunately, earnings per share are down 2.1% a year, over 5 years.
How Does China Resources Pharmaceutical Group’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that China Resources Pharmaceutical Group has a higher P/E than the average (14) P/E for companies in the pharmaceuticals industry.
Its relatively high P/E ratio indicates that China Resources Pharmaceutical Group shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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).