This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at COSCO SHIPPING Ports Limited’s (HKG:1199) P/E ratio and reflect on what it tells us about the company’s share price. COSCO SHIPPING Ports has a P/E ratio of 10.32, based on the last twelve months. That means that at current prices, buyers pay HK$10.32 for every HK$1 in trailing yearly profits.
How Do You Calculate COSCO SHIPPING Ports’s P/E 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 Ports:
P/E of 10.32 = $1.03 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.10 (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 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
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
COSCO SHIPPING Ports’s earnings per share fell by 38% in the last twelve months. But it has grown its earnings per share by 5.4% per year over the last five years.
How Does COSCO SHIPPING Ports’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below, COSCO SHIPPING Ports has a higher P/E than the average company (8.6) in the infrastructure industry.
Its relatively high P/E ratio indicates that COSCO SHIPPING Ports 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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. That means it doesn’t take debt or cash into account. 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.
How Does COSCO SHIPPING Ports’s Debt Impact Its P/E Ratio?
COSCO SHIPPING Ports has net debt worth 56% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On COSCO SHIPPING Ports’s P/E Ratio
COSCO SHIPPING Ports’s P/E is 10.3 which is about average (10.7) in the HK market. With significant debt and no EPS growth last year, the P/E suggests shareholders are expecting higher profit in the future.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visual report on analyst forecasts could hold they key to an excellent investment decision.
But note: COSCO SHIPPING Ports may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.