In This Article:
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how Luzhou Bank Co., Ltd.'s (HKG:1983) P/E ratio could help you assess the value on offer. Luzhou Bank has a P/E ratio of 6.53, based on the last twelve months. That means that at current prices, buyers pay HK$6.53 for every HK$1 in trailing yearly profits.
See our latest analysis for Luzhou Bank
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Luzhou Bank:
P/E of 6.53 = HK$2.56 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.39 (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 necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does Luzhou Bank'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 Luzhou Bank has a higher P/E than the average (5.5) P/E for companies in the banks industry.
That means that the market expects Luzhou Bank will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Luzhou Bank saw earnings per share decrease by 9.3% last year. And over the longer term (5 years) earnings per share have decreased 9.1% annually. So you wouldn't expect a very high P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. 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.