This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Tianli Education International Holdings Limited's (HKG:1773) P/E ratio to inform your assessment of the investment opportunity. What is Tianli Education International Holdings's P/E ratio? Well, based on the last twelve months it is 26.5. That is equivalent to an earnings yield of about 3.8%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Tianli Education International Holdings:
P/E of 26.5 = CN¥3.04 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.11 (Based on the trailing twelve months to June 2019.)
Is A High P/E 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.
Does Tianli Education International Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Tianli Education International Holdings has a higher P/E than the average company (16.2) in the consumer services industry.
Its relatively high P/E ratio indicates that Tianli Education International Holdings shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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 unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Tianli Education International Holdings's earnings per share grew by -8.5% in the last twelve months.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Tianli Education International Holdings's Balance Sheet Tell Us?
The extra options and safety that comes with Tianli Education International Holdings's CN¥626m 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 Tianli Education International Holdings's P/E Ratio
Tianli Education International Holdings's P/E is 26.5 which is above average (10.7) in its market. Recent earnings growth wasn't bad. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Tianli Education International Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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 email@example.com. 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.