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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 LifeTech Scientific Corporation's (HKG:1302) P/E ratio to inform your assessment of the investment opportunity. LifeTech Scientific has a P/E ratio of 35.54, based on the last twelve months. In other words, at today's prices, investors are paying HK$35.54 for every HK$1 in prior year profit.
Check out our latest analysis for LifeTech Scientific
How Do I Calculate A 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 LifeTech Scientific:
P/E of 35.54 = HK$1.20 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.03 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does LifeTech Scientific Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, LifeTech Scientific has a higher P/E than the average company (16.7) in the medical equipment industry.
LifeTech Scientific's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. 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.
LifeTech Scientific maintained roughly steady earnings over the last twelve months. And EPS is down 19% a year, over the last 3 years. So we might expect a relatively low P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.