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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Yantai North Andre Juice Company Limited's (HKG:2218), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Yantai North Andre Juice has a P/E ratio of 12.6. That means that at current prices, buyers pay HK$12.6 for every HK$1 in trailing yearly profits.
View our latest analysis for Yantai North Andre Juice
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Yantai North Andre Juice:
P/E of 12.6 = CN¥4.83 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.38 (Based on the trailing twelve months to December 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 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. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Yantai North Andre Juice's 61% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Even better, EPS is up 26% per year over three years. So you might say it really deserves to have an above-average P/E ratio.
How Does Yantai North Andre Juice's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Yantai North Andre Juice has a lower P/E than the average (15.1) in the food industry classification.
Yantai North Andre Juice's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.