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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 show how you can use Beijing Tong Ren Tang Chinese Medicine Company Limited’s (HKG:3613) P/E ratio to inform your assessment of the investment opportunity. Beijing Tong Ren Tang Chinese Medicine has a price to earnings ratio of 20.71, based on the last twelve months. That corresponds to an earnings yield of approximately 4.8%.
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How Do You Calculate Beijing Tong Ren Tang Chinese Medicine’s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Beijing Tong Ren Tang Chinese Medicine:
P/E of 20.71 = HK$13.36 ÷ HK$0.65 (Based on the year to June 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. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s great to see that Beijing Tong Ren Tang Chinese Medicine grew EPS by 20% in the last year. And earnings per share have improved by 18% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
How Does Beijing Tong Ren Tang Chinese Medicine’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Beijing Tong Ren Tang Chinese Medicine has a higher P/E than the average company (13.7) in the pharmaceuticals industry.
That means that the market expects Beijing Tong Ren Tang Chinese Medicine will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. 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.