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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Wisdom Education International Holdings Company Limited's (HKG:6068) P/E ratio could help you assess the value on offer. What is Wisdom Education International Holdings's P/E ratio? Well, based on the last twelve months it is 20.87. That is equivalent to an earnings yield of about 4.8%.
View our latest analysis for Wisdom Education International Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Wisdom Education International Holdings:
P/E of 20.87 = CN¥3.63 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.17 (Based on the trailing twelve months to February 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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
When earnings fall, the 'E' decreases, over time. 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.
Wisdom Education International Holdings increased earnings per share by a whopping 49% last year. Unfortunately, earnings per share are down 79% a year, over 5 years.
How Does Wisdom Education International Holdings'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 Wisdom Education International Holdings has a higher P/E than the average (15.6) P/E for companies in the consumer services industry.
Its relatively high P/E ratio indicates that Wisdom Education International Holdings shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.