In This Article:
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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 Guangdong Investment Limited’s (HKG:270) P/E ratio and reflect on what it tells us about the company’s share price. Guangdong Investment has a P/E ratio of 19.94, based on the last twelve months. That means that at current prices, buyers pay HK$19.94 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Guangdong Investment
How Do You Calculate Guangdong Investment’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Guangdong Investment:
P/E of 19.94 = HK$15.08 ÷ HK$0.76 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Guangdong Investment’s earnings per share fell by 15% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 2.8%.
How Does Guangdong Investment’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. As you can see below, Guangdong Investment has a higher P/E than the average company (7.2) in the water utilities industry.
Guangdong Investment’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 further research is always essential. I often monitor director buying and selling.
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.