What Does China Huirong Financial Holdings Limited's (HKG:1290) P/E Ratio Tell You?

Simply Wall St

Fri, Jul 12, 2019, 7:53 PM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at China Huirong Financial Holdings Limited's (HKG:1290) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, China Huirong Financial Holdings's P/E ratio is 16.43. In other words, at today's prices, investors are paying HK$16.43 for every HK$1 in prior year profit.

Check out our latest analysis for China Huirong Financial Holdings

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for China Huirong Financial Holdings:

P/E of 16.43 = CN¥0.92 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.056 (Based on the year to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK$1 of company 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.

Does China Huirong Financial Holdings Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that China Huirong Financial Holdings has a higher P/E than the average (7.6) P/E for companies in the consumer finance industry.

SEHK:1290 Price Estimation Relative to Market, July 13th 2019

China Huirong Financial 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

China Huirong Financial Holdings increased earnings per share by an impressive 13% over the last twelve months. Unfortunately, earnings per share are down 21% a year, over 5 years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.