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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 apply a basic P/E ratio analysis to Shougang Fushan Resources Group Limited's (HKG:639), to help you decide if the stock is worth further research. Shougang Fushan Resources Group has a P/E ratio of 8.38, based on the last twelve months. That is equivalent to an earnings yield of about 12%.
See our latest analysis for Shougang Fushan Resources Group
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Shougang Fushan Resources Group:
P/E of 8.38 = HK$1.74 ÷ HK$0.21 (Based on the year to December 2018.)
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. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Shougang Fushan Resources Group's earnings per share were pretty steady over the last year.
How Does Shougang Fushan Resources Group's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Shougang Fushan Resources Group has a P/E ratio that is roughly in line with the metals and mining industry average (8.4).
That indicates that the market expects Shougang Fushan Resources Group will perform roughly in line with other companies in its industry. So if Shougang Fushan Resources Group actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.