In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Sinopec Kantons Holdings Limited's (HKG:934) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Sinopec Kantons Holdings's P/E ratio is 6.35. That means that at current prices, buyers pay HK$6.35 for every HK$1 in trailing yearly profits.
View our latest analysis for Sinopec Kantons Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Sinopec Kantons Holdings:
P/E of 6.35 = HK$3.15 ÷ HK$0.50 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Does Sinopec Kantons Holdings's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (6.7) for companies in the oil and gas industry is roughly the same as Sinopec Kantons Holdings's P/E.
That indicates that the market expects Sinopec Kantons Holdings will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Sinopec Kantons Holdings's earnings per share fell by 2.1% in the last twelve months. But it has grown its earnings per share by 14% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).