What Does China Huirong Financial Holdings Limited's (HKG:1290) P/E Ratio Tell You?
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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 Huirong Financial Holdings Limited's (HKG:1290) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, China Huirong Financial Holdings's P/E ratio is 16.43. In other words, at today's prices, investors are paying HK$16.43 for every HK$1 in prior year profit.
Check out our latest analysis for China Huirong Financial Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for China Huirong Financial Holdings:
P/E of 16.43 = CN¥0.92 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.056 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
Does China Huirong Financial Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that China Huirong Financial Holdings has a higher P/E than the average (7.6) P/E for companies in the consumer finance industry.
China Huirong Financial Holdings'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 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. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
China Huirong Financial Holdings increased earnings per share by an impressive 13% over the last twelve months. Unfortunately, earnings per share are down 21% a year, over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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.
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.
China Huirong Financial Holdings's Balance Sheet
China Huirong Financial Holdings's net debt is 5.2% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Bottom Line On China Huirong Financial Holdings's P/E Ratio
China Huirong Financial Holdings's P/E is 16.4 which is above average (10.8) in its market. Its debt levels do not imperil its balance sheet and it is growing EPS strongly. So on this analysis it seems reasonable that its P/E ratio is above average.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don't have analyst forecasts, you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than China Huirong Financial Holdings. 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 editorial-team@simplywallst.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.
