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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Bao Shen Holdings Limited's (HKG:8151), to help you decide if the stock is worth further research. Bao Shen Holdings has a price to earnings ratio of 8.67, based on the last twelve months. That means that at current prices, buyers pay HK$8.67 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Bao Shen Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Bao Shen Holdings:
P/E of 8.67 = CN¥0.17 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.020 (Based on the trailing twelve months to March 2019.)
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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
It's nice to see that Bao Shen Holdings grew EPS by a stonking 34% in the last year. In contrast, EPS has decreased by 61%, annually, over 5 years.
Does Bao Shen Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Bao Shen Holdings has a lower P/E than the average (10.2) in the consumer durables industry classification.
Its relatively low P/E ratio indicates that Bao Shen Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Bao Shen Holdings, it's quite possible it could surprise on the upside. You 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
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).