Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Zhuhai Holdings Investment Group Limited's (HKG:908) P/E ratio and reflect on what it tells us about the company's share price. Zhuhai Holdings Investment Group has a P/E ratio of 6.16, based on the last twelve months. That corresponds to an earnings yield of approximately 16%.
View our latest analysis for Zhuhai Holdings Investment Group
How Do You Calculate A P/E 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 Zhuhai Holdings Investment Group:
P/E of 6.16 = CN¥0.76 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.12 (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. 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.'
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
Zhuhai Holdings Investment Group's 188% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Even better, EPS is up 19% per year over three years. So you might say it really deserves to have an above-average P/E ratio. Unfortunately, earnings per share are down 1.7% a year, over 5 years.
How Does Zhuhai Holdings Investment Group's P/E Ratio Compare To Its Peers?
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 (15.3) for companies in the hospitality industry is higher than Zhuhai Holdings Investment Group's P/E.
Zhuhai Holdings Investment Group'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 Zhuhai Holdings Investment Group, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.