In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Jiayuan International Group Limited’s (HKG:2768) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Jiayuan International Group’s P/E ratio is 16.63. That is equivalent to an earnings yield of about 6.0%.
See our latest analysis for Jiayuan International Group
How Do I Calculate Jiayuan International Group’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Jiayuan International Group:
P/E of 16.63 = CN¥12.45 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.75 (Based on the trailing twelve months to June 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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. 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.
Jiayuan International Group increased earnings per share by a whopping 50% last year. And earnings per share have improved by 30% annually, over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Jiayuan International Group’s P/E Ratio Compare To Its Peers?
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 (5.3) for companies in the real estate industry is a lot lower than Jiayuan International Group’s P/E.
Its relatively high P/E ratio indicates that Jiayuan International Group 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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.