In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Dongwu Cement International Limited’s (HKG:695) P/E ratio and reflect on what it tells us about the company’s share price. Dongwu Cement International has a P/E ratio of 13.68, based on the last twelve months. In other words, at today’s prices, investors are paying HK$13.68 for every HK$1 in prior year profit.
See our latest analysis for Dongwu Cement International
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Dongwu Cement International:
P/E of 13.68 = CN¥1.18 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.086 (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
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Dongwu Cement International increased earnings per share by a whopping 167% last year. And its annual EPS growth rate over 5 years is 27%. With that performance, I would expect it to have an above average P/E ratio.
How Does Dongwu Cement International’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Dongwu Cement International has a higher P/E than the average company (6.6) in the basic materials industry.
That means that the market expects Dongwu Cement International 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. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.