This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at China Internet Nationwide Financial Services Inc.’s (NASDAQ:CIFS) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, China Internet Nationwide Financial Services’s P/E ratio is 4.61. That means that at current prices, buyers pay $4.61 for every $1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for China Internet Nationwide Financial Services:
P/E of 4.61 = $4.76 ÷ $1.03 (Based on the year 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 $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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s nice to see that China Internet Nationwide Financial Services grew EPS by a stonking 26% in the last year. And earnings per share have improved by 48% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does China Internet Nationwide Financial Services’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that China Internet Nationwide Financial Services has a lower P/E than the average (22.6) P/E for companies in the capital markets industry.
This suggests that market participants think China Internet Nationwide Financial Services will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does China Internet Nationwide Financial Services’s Debt Impact Its P/E Ratio?
The extra options and safety that comes with China Internet Nationwide Financial Services’s US$16m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On China Internet Nationwide Financial Services’s P/E Ratio
China Internet Nationwide Financial Services has a P/E of 4.6. That’s below the average in the US market, which is 17.6. Not only should the net cash position reduce risk, but the recent growth has been impressive. One might conclude that the market is a bit pessimistic, given the low P/E ratio.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ Although we don’t have analyst forecasts, shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than China Internet Nationwide Financial Services. So you may wish to see this free collection of other companies that have grown earnings strongly.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.