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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Uni-President China Holdings Ltd’s (HKG:220) P/E ratio could help you assess the value on offer. Uni-President China Holdings has a price to earnings ratio of 24.65, based on the last twelve months. In other words, at today’s prices, investors are paying HK$24.65 for every HK$1 in prior year profit.
View our latest analysis for Uni-President China Holdings
How Do I Calculate Uni-President China Holdings’s 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 Uni-President China Holdings:
P/E of 24.65 = CN¥5.84 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.24 (Based on the year to June 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Notably, Uni-President China Holdings grew EPS by a whopping 155% in the last year. And it has improved its earnings per share by 5.0% per year over the last three years. So we’d generally expect it to have a relatively high P/E ratio. In contrast, EPS has decreased by 4.3%, annually, over 5 years.
How Does Uni-President China Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Uni-President China Holdings has a higher P/E than the average company (14) in the food industry.
Uni-President China Holdings’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.