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Is COSCO SHIPPING Holdings Co., Ltd.'s (HKG:1919) High P/E Ratio A Problem For Investors?

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Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at COSCO SHIPPING Holdings Co., Ltd.'s (HKG:1919) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, COSCO SHIPPING Holdings has a P/E ratio of 18.31. That is equivalent to an earnings yield of about 5.5%.

Check out our latest analysis for COSCO SHIPPING Holdings

How Do I Calculate COSCO SHIPPING Holdings's Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for COSCO SHIPPING Holdings:

P/E of 18.31 = CN¥2.6 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.14 (Based on the year to March 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

COSCO SHIPPING Holdings's earnings per share fell by 43% in the last twelve months. But it has grown its earnings per share by 37% per year over the last five years.

Does COSCO SHIPPING Holdings 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 COSCO SHIPPING Holdings has a higher P/E than the average (12.2) P/E for companies in the shipping industry.

SEHK:1919 Price Estimation Relative to Market, June 14th 2019
SEHK:1919 Price Estimation Relative to Market, June 14th 2019

Its relatively high P/E ratio indicates that COSCO SHIPPING Holdings 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.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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 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.

So What Does COSCO SHIPPING Holdings's Balance Sheet Tell Us?

Net debt totals a substantial 126% of COSCO SHIPPING Holdings's market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Verdict On COSCO SHIPPING Holdings's P/E Ratio

COSCO SHIPPING Holdings's P/E is 18.3 which is above average (10.8) in the HK market. With relatively high debt, and no earnings per share growth over twelve months, it's safe to say the market believes the company will improve its earnings growth in the future.

Investors should be looking to buy stocks that the market is wrong about. 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.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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 editorial-team@simplywallst.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.