This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Biosino Bio-Technology and Science Incorporation’s (HKG:8247) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Biosino Bio-Technology and Science Incorporation’s P/E ratio is 12.2. That is equivalent to an earnings yield of about 8.2%.
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How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Biosino Bio-Technology and Science Incorporation:
P/E of 12.2 = CN¥1.35 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.11 (Based on the year to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Biosino Bio-Technology and Science Incorporation shrunk earnings per share by 12% over the last year. But over the longer term (5 years) earnings per share have increased by 10.0%.
How Does Biosino Bio-Technology and Science Incorporation’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 Biosino Bio-Technology and Science Incorporation has a lower P/E than the average (13.7) P/E for companies in the biotechs industry.
Biosino Bio-Technology and Science Incorporation’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 Biosino Bio-Technology and Science Incorporation, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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).
Is Debt Impacting Biosino Bio-Technology and Science Incorporation’s P/E?
Biosino Bio-Technology and Science Incorporation has net debt worth 54% of its market capitalization. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Bottom Line On Biosino Bio-Technology and Science Incorporation’s P/E Ratio
Biosino Bio-Technology and Science Incorporation trades on a P/E ratio of 12.2, which is above the HK market average of 10.4. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company.
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.’ We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than Biosino Bio-Technology and Science Incorporation. 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.