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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 Quanzhou Huixin Micro-Credit Co., Ltd.'s (HKG:1577) P/E ratio to inform your assessment of the investment opportunity. Quanzhou Huixin Micro-Credit has a P/E ratio of 9.24, based on the last twelve months. That corresponds to an earnings yield of approximately 11%.
Check out our latest analysis for Quanzhou Huixin Micro-Credit
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Quanzhou Huixin Micro-Credit:
P/E of 9.24 = CN¥1.2 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.13 (Based on the trailing twelve months to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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 Quanzhou Huixin Micro-Credit 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. You can see in the image below that the average P/E (7) for companies in the consumer finance industry is lower than Quanzhou Huixin Micro-Credit's P/E.
Its relatively high P/E ratio indicates that Quanzhou Huixin Micro-Credit shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Quanzhou Huixin Micro-Credit's earnings per share fell by 3.3% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 1.8%. And over the longer term (3 years) earnings per share have decreased 4.9% annually. So you wouldn't expect a very high P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. 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).