Do You Know What China Coal Energy Company Limited’s (HKG:1898) P/E Ratio Means?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at China Coal Energy Company Limited’s (HKG:1898) P/E ratio and reflect on what it tells us about the company’s share price. China Coal Energy has a price to earnings ratio of 8.97, based on the last twelve months. That means that at current prices, buyers pay HK$8.97 for every HK$1 in trailing yearly profits.
View our latest analysis for China Coal Energy
How Do I Calculate China Coal Energy’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for China Coal Energy:
P/E of 8.97 = CN¥2.79 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.31 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. 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 Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s great to see that China Coal Energy grew EPS by 20% in the last year. And its annual EPS growth rate over 5 years is 11%. With that performance, you might expect an above average P/E ratio.
How Does China Coal Energy’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see China Coal Energy has a lower P/E than the average (11.5) in the oil and gas industry classification.
China Coal 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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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.
How Does China Coal Energy’s Debt Impact Its P/E Ratio?
China Coal Energy has net debt worth a very significant 130% 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 China Coal Energy’s P/E Ratio
China Coal Energy’s P/E is 9 which is below average (10.6) in the HK market. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If it continues to grow, then the current low P/E may prove to be unjustified.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ So this free visual report on analyst forecasts could hold they 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.
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.
