The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Sichuan Languang Justbon Services Group Co., Ltd.'s (HKG:2606) P/E ratio and reflect on what it tells us about the company's share price. Sichuan Languang Justbon Services Group has a P/E ratio of 15.58, based on the last twelve months. That is equivalent to an earnings yield of about 6.4%.
How Do You Calculate A 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 Sichuan Languang Justbon Services Group:
P/E of 15.58 = CNY46.63 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CNY2.99 (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 CNY1 the company has earned over the last year. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.
Does Sichuan Languang Justbon Services Group Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, Sichuan Languang Justbon Services Group has a higher P/E than the average company (7.1) in the real estate industry.
Sichuan Languang Justbon Services Group's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. 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. When earnings grow, the 'E' increases, over time. 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.
Sichuan Languang Justbon Services Group's earnings made like a rocket, taking off 60% last year. The cherry on top is that the five year growth rate was an impressive 29% per year. With that kind of growth rate we would generally expect a high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does Sichuan Languang Justbon Services Group's Debt Impact Its P/E Ratio?
Sichuan Languang Justbon Services Group has net cash of CN¥189m. 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 Sichuan Languang Justbon Services Group's P/E Ratio
Sichuan Languang Justbon Services Group has a P/E of 15.6. That's higher than the average in its market, which is 10.6. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Sichuan Languang Justbon Services Group to have a high P/E ratio.
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: Sichuan Languang Justbon Services Group 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).
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.
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