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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Shengjing Bank Co., Ltd.'s (HKG:2066) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Shengjing Bank has a P/E ratio of 4.92. In other words, at today's prices, investors are paying HK$4.92 for every HK$1 in prior year profit.
View our latest analysis for Shengjing Bank
How Do I Calculate Shengjing Bank's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Shengjing Bank:
P/E of 4.92 = CN¥4.35 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.88 (Based on the year to December 2018.)
Is A High Price-to-Earnings 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 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. Then, a higher P/E might scare off shareholders, pushing the share price down.
Shengjing Bank shrunk earnings per share by 32% over the last year. And EPS is down 7.6% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
Does Shengjing Bank Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (5.9) for companies in the banks industry is higher than Shengjing Bank's P/E.
Shengjing Bank's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Shengjing Bank, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.