In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at China MeiDong Auto Holdings Limited's (HKG:1268) P/E ratio and reflect on what it tells us about the company's share price. China MeiDong Auto Holdings has a price to earnings ratio of 11.69, based on the last twelve months. That is equivalent to an earnings yield of about 8.6%.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
See our latest analysis for China MeiDong Auto Holdings
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 China MeiDong Auto Holdings:
P/E of 11.69 = CN¥3.69 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.32 (Based on the year to December 2018.)
Is A High Price-to-Earnings 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
It's great to see that China MeiDong Auto Holdings grew EPS by 25% in the last year. And it has bolstered its earnings per share by 18% per year over the last five years. So one might expect an above average P/E ratio.
Does China MeiDong Auto Holdings 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 (11.1) for companies in the specialty retail industry is roughly the same as China MeiDong Auto Holdings's P/E.
China MeiDong Auto Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. So if China MeiDong Auto Holdings 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
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.