Do You Know What Beijing Jingneng Clean Energy Co Limited’s (HKG:579) P/E Ratio Means?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Beijing Jingneng Clean Energy Co Limited’s (HKG:579) P/E ratio could help you assess the value on offer. Beijing Jingneng Clean Energy has a price to earnings ratio of 4.7, based on the last twelve months. That is equivalent to an earnings yield of about 21%.
See our latest analysis for Beijing Jingneng Clean Energy
How Do I Calculate Beijing Jingneng Clean Energy’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Beijing Jingneng Clean Energy:
P/E of 4.7 = CN¥1.32 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.28 (Based on the trailing twelve months to June 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. 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Beijing Jingneng Clean Energy’s earnings per share fell by 3.1% in the last twelve months. But EPS is up 11% over the last 5 years.
How Does Beijing Jingneng Clean Energy’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (10.8) for companies in the renewable energy industry is higher than Beijing Jingneng Clean Energy’s P/E.
This suggests that market participants think Beijing Jingneng Clean Energy will underperform other companies in its 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.
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. 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.
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).
Is Debt Impacting Beijing Jingneng Clean Energy’s P/E?
Beijing Jingneng Clean Energy has net debt worth a very significant 205% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Bottom Line On Beijing Jingneng Clean Energy’s P/E Ratio
Beijing Jingneng Clean Energy has a P/E of 4.7. That’s below the average in the HK market, which is 10.7. 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. So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
You might be able to find a better buy than Beijing Jingneng Clean Energy. 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
