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 COSCO SHIPPING Energy Transportation Co., Ltd.'s (HKG:1138), to help you decide if the stock is worth further research. COSCO SHIPPING Energy Transportation has a P/E ratio of 26.26, based on the last twelve months. That is equivalent to an earnings yield of about 3.8%.
How Do You Calculate COSCO SHIPPING Energy Transportation's P/E 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 COSCO SHIPPING Energy Transportation:
P/E of 26.26 = CN¥4.04 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.15 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
How Does COSCO SHIPPING Energy Transportation'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 COSCO SHIPPING Energy Transportation has a higher P/E than the average (12.7) P/E for companies in the shipping industry.
That means that the market expects COSCO SHIPPING Energy Transportation will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
COSCO SHIPPING Energy Transportation shrunk earnings per share by 44% over the last year. And it has shrunk its earnings per share by 27% per year over the last three years. This growth rate might warrant a low P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. 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.
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).
How Does COSCO SHIPPING Energy Transportation's Debt Impact Its P/E Ratio?
Net debt totals 86% of COSCO SHIPPING Energy Transportation's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On COSCO SHIPPING Energy Transportation's P/E Ratio
COSCO SHIPPING Energy Transportation's P/E is 26.3 which is above average (9.8) in its market. With relatively high debt, and no earnings per share growth over twelve months, it's safe to say the market believes the company will improve its earnings growth in the future.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.