Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Changhong Jiahua Holdings Limited's (HKG:8016) P/E ratio and reflect on what it tells us about the company's share price. What is Changhong Jiahua Holdings's P/E ratio? Well, based on the last twelve months it is 4.4. That is equivalent to an earnings yield of about 23%.
View our latest analysis for Changhong Jiahua Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Changhong Jiahua Holdings:
P/E of 4.4 = HK$0.52 ÷ HK$0.12 (Based on the year to March 2019.)
Is A High Price-to-Earnings 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.'
Does Changhong Jiahua Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (9.6) for companies in the electronic industry is higher than Changhong Jiahua Holdings's P/E.
Its relatively low P/E ratio indicates that Changhong Jiahua Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Changhong Jiahua Holdings, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
It's great to see that Changhong Jiahua Holdings grew EPS by 19% in the last year. And its annual EPS growth rate over 5 years is 9.3%. With that performance, you might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.