In This Article:
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 Bank of Qingdao Co., Ltd.'s (HKG:3866), to help you decide if the stock is worth further research. Based on the last twelve months, Bank of Qingdao's P/E ratio is 15.64. That means that at current prices, buyers pay HK$15.64 for every HK$1 in trailing yearly profits.
View our latest analysis for Bank of Qingdao
How Do I Calculate Bank of Qingdao'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 Bank of Qingdao:
P/E of 15.64 = HK$6.12 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.39 (Based on the year to September 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.
Does Bank of Qingdao Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Bank of Qingdao has a higher P/E than the average (5.8) P/E for companies in the banks industry.
Its relatively high P/E ratio indicates that Bank of Qingdao shareholders think it will perform better than other companies in its industry classification. 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.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Bank of Qingdao's earnings per share were pretty steady over the last year. And over the longer term (5 years) earnings per share have decreased 7.7% annually. So it would be surprising to see a high P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.