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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at China Wood Optimization (Holding) Limited's (HKG:1885) P/E ratio and reflect on what it tells us about the company's share price. China Wood Optimization (Holding) has a price to earnings ratio of 23.39, based on the last twelve months. That is equivalent to an earnings yield of about 4.3%.
View our latest analysis for China Wood Optimization (Holding)
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for China Wood Optimization (Holding):
P/E of 23.39 = CN¥1.63 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.070 (Based on the trailing twelve months to December 2018.)
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
If earnings fall then in the future the 'E' will be lower. 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.
It's great to see that China Wood Optimization (Holding) grew EPS by 23% in the last year. Unfortunately, earnings per share are down 2.5% a year, over 3 years.
How Does China Wood Optimization (Holding)'s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, China Wood Optimization (Holding) has a higher P/E than the average company (20.1) in the forestry industry.
Its relatively high P/E ratio indicates that China Wood Optimization (Holding) shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.