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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Wisdom Education International Holdings Company Limited's (HKG:6068) P/E ratio and reflect on what it tells us about the company's share price. Wisdom Education International Holdings has a price to earnings ratio of 18.33, based on the last twelve months. That means that at current prices, buyers pay HK$18.33 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Wisdom Education International Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Wisdom Education International Holdings:
P/E of 18.33 = HK$3.19 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.17 (Based on the year to February 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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Does Wisdom Education International 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. You can see in the image below that the average P/E (17.1) for companies in the consumer services industry is roughly the same as Wisdom Education International Holdings's P/E.
Wisdom Education International Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Wisdom Education International Holdings actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
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.
Wisdom Education International Holdings increased earnings per share by a whopping 49% last year. But earnings per share are down 79% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.