Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Shenzhou International Group Holdings Limited's (HKG:2313) P/E ratio to inform your assessment of the investment opportunity. Shenzhou International Group Holdings has a P/E ratio of 30.75, based on the last twelve months. That means that at current prices, buyers pay HK$30.75 for every HK$1 in trailing yearly profits.
How Do You Calculate Shenzhou International Group Holdings's P/E 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 Shenzhou International Group Holdings:
P/E of 30.75 = HK$97.72 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$3.18 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Shenzhou International Group Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Shenzhou International Group Holdings has a much higher P/E than the average company (9.1) in the luxury industry.
That means that the market expects Shenzhou International Group Holdings will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Shenzhou International Group Holdings increased earnings per share by an impressive 15% over the last twelve months. And earnings per share have improved by 20% annually, over the last five years. So one might expect an above average P/E ratio.
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. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting Shenzhou International Group Holdings's P/E?
Shenzhou International Group Holdings has net cash of CN¥5.6b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Shenzhou International Group Holdings's P/E Ratio
Shenzhou International Group Holdings trades on a P/E ratio of 30.7, which is multiples above its market average of 10.2. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. So it does not seem strange that the P/E is above average.
Investors should be looking to buy stocks that the market is wrong about. 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.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
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