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 Shenzhou International Group Holdings Limited’s (HKG:2313) P/E ratio to inform your assessment of the investment opportunity. What is Shenzhou International Group Holdings’s P/E ratio? Well, based on the last twelve months it is 32.05. That is equivalent to an earnings yield of about 3.1%.
How Do I Calculate Shenzhou International Group Holdings’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Shenzhou International Group Holdings:
P/E of 32.05 = CN¥101.86 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥3.18 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
How Does Shenzhou International Group Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Shenzhou International Group Holdings has a significantly higher P/E than the average (8.8) P/E for companies in the luxury industry.
Its relatively high P/E ratio indicates that Shenzhou International Group Holdings shareholders think it will perform better than other companies in its industry classification.
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 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.
It’s great to see that Shenzhou International Group Holdings grew EPS by 15% in the last year. And earnings per share have improved by 20% annually, over the last five years. This could arguably justify a relatively high P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 Verdict On Shenzhou International Group Holdings’s P/E Ratio
Shenzhou International Group Holdings’s P/E is 32 which is above average (10.7) in its market. 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 have an opportunity when market expectations about a stock are wrong. 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 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 Shenzhou International Group Holdings. 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.