Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Rizhao Port Jurong Co., Ltd.'s (HKG:6117) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Rizhao Port Jurong's P/E ratio is 6.06. That means that at current prices, buyers pay HK$6.06 for every HK$1 in trailing yearly profits.

Check out our latest analysis for Rizhao Port Jurong

How Do You Calculate A 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 Rizhao Port Jurong:

P/E of 6.06 = CN¥0.593 ÷ CN¥0.098 (Based on the trailing twelve months to December 2019.)

(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each CN¥1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Does Rizhao Port Jurong's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (6.4) for companies in the infrastructure industry is roughly the same as Rizhao Port Jurong's P/E.

That indicates that the market expects Rizhao Port Jurong will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.

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. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Rizhao Port Jurong's earnings per share fell by 21% in the last twelve months. But it has grown its earnings per share by 8.4% per year over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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).