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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at New Universe Environmental Group Limited's (HKG:436) P/E ratio and reflect on what it tells us about the company's share price. New Universe Environmental Group has a P/E ratio of 12.45, based on the last twelve months. That corresponds to an earnings yield of approximately 8.0%.
See our latest analysis for New Universe Environmental Group
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for New Universe Environmental Group:
P/E of 12.45 = HK$0.30 ÷ HK$0.025 (Based on the year to December 2018.)
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 New Universe Environmental Group Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that New Universe Environmental Group has a P/E ratio that is roughly in line with the commercial services industry average (13.2).
Its P/E ratio suggests that New Universe Environmental Group shareholders think that in the future it will perform about the same as other companies in its industry classification. So if New Universe Environmental Group actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
New Universe Environmental Group saw earnings per share decrease by 12% last year. But it has grown its earnings per share by 12% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.