In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at CMBC Capital Holdings Limited's (HKG:1141) P/E ratio and reflect on what it tells us about the company's share price. CMBC Capital Holdings has a P/E ratio of 23.08, based on the last twelve months. That means that at current prices, buyers pay HK$23.08 for every HK$1 in trailing yearly profits.
Check out our latest analysis for CMBC Capital Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for CMBC Capital Holdings:
P/E of 23.08 = HK$0.14 ÷ HK$0.01 (Based on the year to June 2019.)
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 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.
Does CMBC Capital Holdings 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. The image below shows that CMBC Capital Holdings has a higher P/E than the average (11.9) P/E for companies in the capital markets industry.
That means that the market expects CMBC Capital Holdings will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or 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. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Notably, CMBC Capital Holdings grew EPS by a whopping 35% in the last year. But earnings per share are down 50% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.