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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Jinshang Bank Co., Ltd.'s (HKG:2558) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Jinshang Bank has a P/E ratio of 6.40. That means that at current prices, buyers pay HK$6.40 for every HK$1 in trailing yearly profits.
View our latest analysis for Jinshang Bank
How Do I Calculate Jinshang Bank'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 Jinshang Bank:
P/E of 6.40 = HK$1.82 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.28 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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 Does Jinshang Bank's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (5.8) for companies in the banks industry is lower than Jinshang Bank's P/E.
Its relatively high P/E ratio indicates that Jinshang Bank 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 further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Jinshang Bank saw earnings per share decrease by 27% last year. And it has shrunk its earnings per share by 6.9% per year over the last five years. This might lead to muted expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.