To the annoyance of some shareholders, COSCO SHIPPING Ports (HKG:1199) shares are down a considerable 31% in the last month. That drop has capped off a tough year for shareholders, with the share price down 47% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Does COSCO SHIPPING Ports Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 5.55 that sentiment around COSCO SHIPPING Ports isn't particularly high. If you look at the image below, you can see COSCO SHIPPING Ports has a lower P/E than the average (6.6) in the infrastructure industry classification.
This suggests that market participants think COSCO SHIPPING Ports will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
COSCO SHIPPING Ports's earnings per share fell by 3.5% in the last twelve months. But it has grown its earnings per share by 5.1% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 1.1% annually. 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. So it won't reflect the advantage of cash, or disadvantage of debt. 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 expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does COSCO SHIPPING Ports's Balance Sheet Tell Us?
Net debt totals a substantial 105% of COSCO SHIPPING Ports's market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Bottom Line On COSCO SHIPPING Ports's P/E Ratio
COSCO SHIPPING Ports has a P/E of 5.5. That's below the average in the HK market, which is 9.2. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. Given COSCO SHIPPING Ports's P/E ratio has declined from 8.0 to 5.5 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than COSCO SHIPPING Ports. 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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