In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how China Infrastructure & Logistics Group Ltd.’s (HKG:1719) P/E ratio could help you assess the value on offer. Based on the last twelve months, China Infrastructure & Logistics Group’s P/E ratio is 28.59. That corresponds to an earnings yield of approximately 3.5%.
See our latest analysis for China Infrastructure & Logistics Group
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How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for China Infrastructure & Logistics Group:
P/E of 28.59 = HK$1.1 ÷ HK$0.038 (Based on the year to June 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
China Infrastructure & Logistics Group saw earnings per share decrease by 13% last year. But it has grown its earnings per share by 33% per year over the last five years.
How Does China Infrastructure & Logistics Group’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, China Infrastructure & Logistics Group has a much higher P/E than the average company (8.8) in the infrastructure industry.
China Infrastructure & Logistics Group’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.