In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at China Weaving Materials Holdings Limited's (HKG:3778) P/E ratio and reflect on what it tells us about the company's share price. China Weaving Materials Holdings has a price to earnings ratio of 5.63, based on the last twelve months. That corresponds to an earnings yield of approximately 17.8%.
Check out our latest analysis for China Weaving Materials Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for China Weaving Materials Holdings:
P/E of 5.63 = HK$0.32 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.06 (Based on the trailing twelve months to June 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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does China Weaving Materials Holdings Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (8.9) for companies in the luxury industry is higher than China Weaving Materials Holdings's P/E.
Its relatively low P/E ratio indicates that China Weaving Materials Holdings shareholders think it will struggle to do as well as other companies in its industry classification. 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.
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. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
China Weaving Materials Holdings saw earnings per share decrease by 2.8% last year. But EPS is up 34% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.