The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Haier Electronics Group Co., Ltd.'s (HKG:1169) P/E ratio to inform your assessment of the investment opportunity. Haier Electronics Group has a price to earnings ratio of 14.74, based on the last twelve months. That is equivalent to an earnings yield of about 6.8%.
How Do You Calculate Haier Electronics Group's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Haier Electronics Group:
P/E of 14.74 = HK$20.69 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$1.40 (Based on the year to June 2019.)
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 Haier Electronics Group Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Haier Electronics Group has a higher P/E than the average (13.3) P/E for companies in the consumer durables industry.
Its relatively high P/E ratio indicates that Haier Electronics Group 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 delve deeper. I like to check if company insiders have been buying or selling.
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 even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Haier Electronics Group saw earnings per share improve by -7.3% last year. And earnings per share have improved by 11% annually, over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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 Haier Electronics Group's P/E?
With net cash of CN¥20b, Haier Electronics Group has a very strong balance sheet, which may be important for its business. Having said that, at 35% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Haier Electronics Group's P/E Ratio
Haier Electronics Group trades on a P/E ratio of 14.7, which is above its market average of 10.5. Earnings improved over the last year. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders think it will.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Haier Electronics Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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.