In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use China Resources Cement Holdings Limited's (HKG:1313) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, China Resources Cement Holdings's P/E ratio is 6.65. That corresponds to an earnings yield of approximately 15%.
View our latest analysis for China Resources Cement Holdings
How Do I Calculate China Resources Cement Holdings's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for China Resources Cement Holdings:
P/E of 6.65 = HK$7.42 ÷ HK$1.12 (Based on the trailing twelve months to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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.'
How Does China Resources Cement 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. The image below shows that China Resources Cement Holdings has a higher P/E than the average (6.2) P/E for companies in the basic materials industry.
China Resources Cement Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or 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. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
In the last year, China Resources Cement Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 52% gain was both fast and well deserved. And earnings per share have improved by 172% annually, over the last three years. So you might say it really deserves to have an above-average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).