In This Article:
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 Xingda International Holdings Limited’s (HKG:1899) P/E ratio to inform your assessment of the investment opportunity. Xingda International Holdings has a price to earnings ratio of 14.86, based on the last twelve months. That means that at current prices, buyers pay HK$14.86 for every HK$1 in trailing yearly profits.
View our latest analysis for Xingda International Holdings
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 Xingda International Holdings:
P/E of 14.86 = CN¥2.02 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.14 (Based on the year to June 2018.)
Is A High P/E 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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Xingda International Holdings’s earnings per share fell by 52% in the last twelve months. But over the longer term (3 years), earnings per share have increased by 15%. And EPS is down 5.8% a year, over the last 5 years. This might lead to muted expectations.
How Does Xingda 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 Xingda International Holdings has a higher P/E than the average (11.4) P/E for companies in the auto components industry.
Xingda International Holdings’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).