In This Article:
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 BOC Aviation Limited's (HKG:2588), to help you decide if the stock is worth further research. BOC Aviation has a P/E ratio of 9.44, based on the last twelve months. That corresponds to an earnings yield of approximately 11%.
View our latest analysis for BOC Aviation
How Do You Calculate BOC Aviation's 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 BOC Aviation:
P/E of 9.44 = $8.44 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.89 (Based on the year to December 2018.)
Is A High Price-to-Earnings 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 Does BOC Aviation'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 BOC Aviation has a lower P/E than the average (10.5) P/E for companies in the trade distributors industry.
This suggests that market participants think BOC Aviation will underperform other companies in its industry. Since the market seems unimpressed with BOC Aviation, 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
BOC Aviation saw earnings per share improve by -5.8% last year. And its annual EPS growth rate over 5 years is 14%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.