This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Yuexiu Transport Infrastructure Limited's (HKG:1052), to help you decide if the stock is worth further research. Yuexiu Transport Infrastructure has a P/E ratio of 8.38, based on the last twelve months. That means that at current prices, buyers pay HK$8.38 for every HK$1 in trailing yearly profits.
How Do You Calculate Yuexiu Transport Infrastructure'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 Yuexiu Transport Infrastructure:
P/E of 8.38 = HK$6.15 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.73 (Based on the year to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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 Yuexiu Transport Infrastructure's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Yuexiu Transport Infrastructure has a P/E ratio that is roughly in line with the infrastructure industry average (8.4).
That indicates that the market expects Yuexiu Transport Infrastructure will perform roughly in line with other companies in its industry. So if Yuexiu Transport Infrastructure actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Most would be impressed by Yuexiu Transport Infrastructure earnings growth of 19% in the last year. And its annual EPS growth rate over 5 years is 16%. This could arguably justify a relatively high P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
Is Debt Impacting Yuexiu Transport Infrastructure's P/E?
Net debt is 45% of Yuexiu Transport Infrastructure's market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Yuexiu Transport Infrastructure's P/E Ratio
Yuexiu Transport Infrastructure trades on a P/E ratio of 8.4, which is below the HK market average of 10.2. The company hasn't stretched its balance sheet, and earnings growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Yuexiu Transport Infrastructure. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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