This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use Kunlun Energy Company Limited's (HKG:135) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Kunlun Energy's P/E ratio is 10.82. That means that at current prices, buyers pay HK$10.82 for every HK$1 in trailing yearly profits.
How Do You Calculate Kunlun Energy's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Kunlun Energy:
P/E of 10.82 = CN¥6.21 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.57 (Based on the trailing twelve months to December 2018.)
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 isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.
How Does Kunlun Energy'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 Kunlun Energy has a lower P/E than the average (15.8) P/E for companies in the gas utilities industry.
Kunlun Energy's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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
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.
Kunlun Energy saw earnings per share decrease by 2.6% last year. But over the longer term (3 years), earnings per share have increased by 55%. And it has shrunk its earnings per share by 2.9% per year over the last five years. So we might expect a relatively low P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.
So What Does Kunlun Energy's Balance Sheet Tell Us?
Kunlun Energy has net debt equal to 34% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Kunlun Energy's P/E Ratio
Kunlun Energy trades on a P/E ratio of 10.8, which is fairly close to the HK market average of 10.6. When you consider the lack of EPS growth last year (along with some debt), it seems the market is optimistic about the future for the business.
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 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. Thank you for reading.