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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 China Chunlai Education Group Co., Ltd.'s (HKG:1969), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, China Chunlai Education Group has a P/E ratio of 12.93. In other words, at today's prices, investors are paying HK$12.93 for every HK$1 in prior year profit.
View our latest analysis for China Chunlai Education Group
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for China Chunlai Education Group:
P/E of 12.93 = CN¥1.47 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.11 (Based on the year to February 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does China Chunlai Education Group's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see China Chunlai Education Group has a lower P/E than the average (16.2) in the consumer services industry classification.
Its relatively low P/E ratio indicates that China Chunlai Education Group shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
China Chunlai Education Group saw earnings per share decrease by 35% last year.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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).