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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how Zhengye International Holdings Company Limited's (HKG:3363) P/E ratio could help you assess the value on offer. What is Zhengye International Holdings's P/E ratio? Well, based on the last twelve months it is 4.26. That means that at current prices, buyers pay HK$4.26 for every HK$1 in trailing yearly profits.
See our latest analysis for Zhengye International Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Zhengye International Holdings:
P/E of 4.26 = CN¥0.93 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.22 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Zhengye International Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Zhengye International Holdings has a lower P/E than the average (10.1) P/E for companies in the packaging industry.
This suggests that market participants think Zhengye International Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Zhengye International Holdings saw earnings per share decrease by 40% last year. But it has grown its earnings per share by 26% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.