What Does China Longyuan Power Group Corporation Limited's (HKG:916) P/E Ratio Tell You?
Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how China Longyuan Power Group Corporation Limited's (HKG:916) P/E ratio could help you assess the value on offer. Based on the last twelve months, China Longyuan Power Group's P/E ratio is 6.22. That means that at current prices, buyers pay HK$6.22 for every HK$1 in trailing yearly profits.
See our latest analysis for China Longyuan Power Group
How Do You Calculate China Longyuan Power Group's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for China Longyuan Power Group:
P/E of 6.22 = CN¥3.350 ÷ CN¥0.538 (Based on the trailing twelve months to March 2020.)
(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?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Does China Longyuan Power Group's P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (6.3) for companies in the renewable energy industry is roughly the same as China Longyuan Power Group's P/E.
China Longyuan Power Group's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Most would be impressed by China Longyuan Power Group earnings growth of 10% in the last year.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does China Longyuan Power Group's Balance Sheet Tell Us?
China Longyuan Power Group's net debt is considerable, at 278% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On China Longyuan Power Group's P/E Ratio
China Longyuan Power Group has a P/E of 6.2. That's below the average in the HK market, which is 9.3. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.
Investors have an opportunity when market expectations about a stock are wrong. 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 be able to find a better stock than China Longyuan Power Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
