Does Chinese People Holdings Company Limited (HKG:681) Have A Good P/E Ratio?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use Chinese People Holdings Company Limited’s (HKG:681) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Chinese People Holdings’s P/E ratio is 2.76. That corresponds to an earnings yield of approximately 36%.
View our latest analysis for Chinese People Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Chinese People Holdings:
P/E of 2.76 = CN¥0.078 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.028 (Based on the year to March 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company 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
P/E ratios primarily reflect market expectations around earnings growth rates. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Chinese People Holdings increased earnings per share by a whopping 29% last year. And its annual EPS growth rate over 5 years is 41%. I’d therefore be a little surprised if its P/E ratio was not relatively high.
How Does Chinese People 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 Chinese People Holdings has a lower P/E than the average (11.8) P/E for companies in the oil and gas industry.
Its relatively low P/E ratio indicates that Chinese People Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
Is Debt Impacting Chinese People Holdings’s P/E?
Since Chinese People Holdings holds net cash of CN¥281m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Chinese People Holdings’s P/E Ratio
Chinese People Holdings has a P/E of 2.8. That’s below the average in the HK market, which is 10.7. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. One might conclude that the market is a bit pessimistic, given the low P/E ratio.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. Although we don’t have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
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.
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 editorial-team@simplywallst.com.
