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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Greentown Service Group Co. Ltd.'s (HKG:2869) P/E ratio and reflect on what it tells us about the company's share price. Greentown Service Group has a price to earnings ratio of 31.46, based on the last twelve months. That is equivalent to an earnings yield of about 3.2%.
Check out our latest analysis for Greentown Service Group
How Do I Calculate Greentown Service Group's Price To Earnings 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 Greentown Service Group:
P/E of 31.46 = CN¥5.47 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.17 (Based on the trailing twelve months to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company 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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
Most would be impressed by Greentown Service Group earnings growth of 25% in the last year. And it has bolstered its earnings per share by 33% per year over the last five years. This could arguably justify a relatively high P/E ratio.
Does Greentown Service Group Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (13.7) for companies in the commercial services industry is lower than Greentown Service Group's P/E.
Greentown Service Group's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.