Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Dynagreen Environmental Protection Group Co., Ltd.'s (HKG:1330), to help you decide if the stock is worth further research. What is Dynagreen Environmental Protection Group's P/E ratio? Well, based on the last twelve months it is 10.74. That is equivalent to an earnings yield of about 9.3%.
How Do I Calculate Dynagreen Environmental Protection Group's Price To Earnings 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 Dynagreen Environmental Protection Group:
P/E of 10.74 = HK$2.86 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.27 (Based on the trailing twelve months to June 2019.)
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.
How Does Dynagreen Environmental Protection 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. The image below shows that Dynagreen Environmental Protection Group has a lower P/E than the average (14.2) P/E for companies in the commercial services industry.
Its relatively low P/E ratio indicates that Dynagreen Environmental Protection Group 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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Dynagreen Environmental Protection Group increased earnings per share by an impressive 16% over the last twelve months. And its annual EPS growth rate over 5 years is 23%. So one might expect an above average P/E ratio.
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. 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).
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Dynagreen Environmental Protection Group's Balance Sheet
Net debt totals 67% of Dynagreen Environmental Protection Group's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On Dynagreen Environmental Protection Group's P/E Ratio
Dynagreen Environmental Protection Group's P/E is 10.7 which is about average (10.5) in the HK market. While it does have meaningful debt levels, it has also produced strong earnings growth recently. The P/E suggests the market isn't confident that growth will be sustained, though.
Investors should be looking to buy stocks that the market is wrong about. 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 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.
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.
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. Thank you for reading.