This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Beijing Urban Construction Design & Development Group Co., Limited's (HKG:1599) P/E ratio and reflect on what it tells us about the company's share price. What is Beijing Urban Construction Design & Development Group's P/E ratio? Well, based on the last twelve months it is 3.95. That means that at current prices, buyers pay HK$3.95 for every HK$1 in trailing yearly profits.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Beijing Urban Construction Design & Development Group:
P/E of 3.95 = CN¥1.927 ÷ CN¥0.488 (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 P/E 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.
Does Beijing Urban Construction Design & Development Group Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (7.9) for companies in the construction industry is higher than Beijing Urban Construction Design & Development Group's P/E.
Its relatively low P/E ratio indicates that Beijing Urban Construction Design & Development Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Beijing Urban Construction Design & Development Group, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Most would be impressed by Beijing Urban Construction Design & Development Group earnings growth of 17% in the last year. And it has bolstered its earnings per share by 8.3% per year over the last five years. With that performance, you might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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 investing in growth. That means taking on debt (or spending its cash).
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 Beijing Urban Construction Design & Development Group's Balance Sheet Tell Us?
Net debt is 41% of Beijing Urban Construction Design & Development Group's market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On Beijing Urban Construction Design & Development Group's P/E Ratio
Beijing Urban Construction Design & Development Group's P/E is 4.0 which is below average (9.5) in the HK market. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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. Thank you for reading.