Here's What China VAST Industrial Urban Development Company Limited's (HKG:6166) P/E Ratio Is Telling Us
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 China VAST Industrial Urban Development Company Limited's (HKG:6166) P/E ratio to inform your assessment of the investment opportunity. What is China VAST Industrial Urban Development's P/E ratio? Well, based on the last twelve months it is 4.24. That means that at current prices, buyers pay HK$4.24 for every HK$1 in trailing yearly profits.
Check out our latest analysis for China VAST Industrial Urban Development
How Do You Calculate A 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 VAST Industrial Urban Development:
P/E of 4.24 = CN¥2.81 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.66 (Based on the trailing twelve months to June 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. 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 VAST Industrial Urban Development's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that China VAST Industrial Urban Development has a lower P/E than the average (6.1) P/E for companies in the real estate industry.
China VAST Industrial Urban Development's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
China VAST Industrial Urban Development saw earnings per share decrease by 20% last year. But over the longer term (5 years) earnings per share have increased by 4.7%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
China VAST Industrial Urban Development's Balance Sheet
China VAST Industrial Urban Development's net debt is 99% of its market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On China VAST Industrial Urban Development's P/E Ratio
China VAST Industrial Urban Development has a P/E of 4.2. That's below the average in the HK market, which is 10.4. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.
But note: China VAST Industrial Urban Development may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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 editorial-team@simplywallst.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.
