This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at COSCO SHIPPING Energy Transportation Co., Ltd.'s (HKG:1138) P/E ratio and reflect on what it tells us about the company's share price. What is COSCO SHIPPING Energy Transportation's P/E ratio? Well, based on the last twelve months it is 12.70. That means that at current prices, buyers pay HK$12.70 for every HK$1 in trailing yearly profits.
How Do You Calculate COSCO SHIPPING Energy Transportation's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for COSCO SHIPPING Energy Transportation:
P/E of 12.70 = CN¥3.021 ÷ CN¥0.238 (Based on the year to September 2019.)
(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)
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. 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?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (5.6) for companies in the oil and gas industry is lower than COSCO SHIPPING Energy Transportation's P/E.
Its relatively high P/E ratio indicates that COSCO SHIPPING Energy Transportation shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or 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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
COSCO SHIPPING Energy Transportation's 287% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
COSCO SHIPPING Energy Transportation's Balance Sheet
COSCO SHIPPING Energy Transportation has net debt worth a very significant 123% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.
The Bottom Line On COSCO SHIPPING Energy Transportation's P/E Ratio
COSCO SHIPPING Energy Transportation has a P/E of 12.7. That's higher than the average in its market, which is 9.4. Its meaningful level of debt should warrant a lower P/E ratio, but the fast EPS growth is a positive. So it seems likely the market is overlooking the debt because of the fast earnings growth.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than COSCO SHIPPING Energy Transportation. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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. Thank you for reading.