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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 Anxian Yuan China Holdings Limited's (HKG:922) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Anxian Yuan China Holdings has a P/E ratio of 10.82. That means that at current prices, buyers pay HK$10.82 for every HK$1 in trailing yearly profits.
View our latest analysis for Anxian Yuan China Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Anxian Yuan China Holdings:
P/E of 10.82 = HK$0.25 ÷ HK$0.023 (Based on the year to March 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Anxian Yuan China Holdings's earnings per share fell by 2.2% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 21%.
How Does Anxian Yuan 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. The image below shows that Anxian Yuan China Holdings has a lower P/E than the average (15.9) P/E for companies in the consumer services industry.
This suggests that market participants think Anxian Yuan China Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.