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 Fosun International Limited's (HKG:656) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Fosun International's P/E ratio is 5.56. In other words, at today's prices, investors are paying HK$5.56 for every HK$1 in prior year profit.
How Do You Calculate Fosun International's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Fosun International:
P/E of 5.56 = CN¥8.7 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥1.57 (Based on the year to December 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Fosun International 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. If you look at the image below, you can see Fosun International has a lower P/E than the average (6.4) in the industrials industry classification.
Fosun International's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Fosun International, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
Fosun International's earnings per share grew by -2.0% in the last twelve months. And it has bolstered its earnings per share by 13% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Fosun International's P/E?
Net debt is 37% of Fosun International's market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Fosun International's P/E Ratio
Fosun International has a P/E of 5.6. That's below the average in the HK market, which is 10.4. EPS grew over the last twelve months, and debt levels are quite reasonable. If growth is sustainable over the long term, then the current P/E ratio may be a sign of good value.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Fosun International. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 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. Thank you for reading.