This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use China Resources Cement Holdings Limited's (HKG:1313) P/E ratio to inform your assessment of the investment opportunity. What is China Resources Cement Holdings's P/E ratio? Well, based on the last twelve months it is 8.84. That is equivalent to an earnings yield of about 11.3%.
How Do I Calculate China Resources Cement Holdings's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for China Resources Cement Holdings:
P/E of 8.84 = HKD9.72 ÷ HKD1.10 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HKD1 the company has earned over the last year. 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 Resources Cement Holdings's P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that China Resources Cement Holdings has a higher P/E than the average (5.5) P/E for companies in the basic materials industry.
Its relatively high P/E ratio indicates that China Resources Cement Holdings shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
China Resources Cement Holdings's earnings per share grew by -3.6% in the last twelve months. And its annual EPS growth rate over 5 years is 10%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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 China Resources Cement Holdings's Debt Impact Its P/E Ratio?
China Resources Cement Holdings's net debt is 1.7% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Bottom Line On China Resources Cement Holdings's P/E Ratio
China Resources Cement Holdings has a P/E of 8.8. That's below the average in the HK market, which is 10.4. The company hasn't stretched its balance sheet, and earnings are improving. If you believe growth will continue - or even increase - then the low P/E may signify opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
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.
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