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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use China Boqi Environmental (Holding) Co., Ltd.'s (HKG:2377) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, China Boqi Environmental (Holding) has a P/E ratio of 5.14. In other words, at today's prices, investors are paying HK$5.14 for every HK$1 in prior year profit.
View our latest analysis for China Boqi Environmental (Holding)
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for China Boqi Environmental (Holding):
P/E of 5.14 = CN¥1.1 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.21 (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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does China Boqi Environmental (Holding)'s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that China Boqi Environmental (Holding) has a lower P/E than the average (12.5) P/E for companies in the commercial services industry.
China Boqi Environmental (Holding)'s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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.
China Boqi Environmental (Holding) shrunk earnings per share by 27% over the last year. But EPS is up 4.3% over the last 5 years. And EPS is down 2.4% a year, over the last 3 years. This could justify a low P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.