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 Asia Allied Infrastructure Holdings Limited's (HKG:711) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Asia Allied Infrastructure Holdings has a P/E ratio of 9.33. That corresponds to an earnings yield of approximately 10.7%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Asia Allied Infrastructure Holdings:
P/E of 9.33 = HK$0.650 ÷ HK$0.070 (Based on the trailing twelve months to September 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings 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.
Does Asia Allied Infrastructure Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Asia Allied Infrastructure Holdings has a higher P/E than the average (7.9) P/E for companies in the construction industry.
That means that the market expects Asia Allied Infrastructure Holdings will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Asia Allied Infrastructure Holdings saw earnings per share decrease by 22% last year. But EPS is up 4.6% over the last 5 years. And it has shrunk its earnings per share by 7.6% per year over the last three years. This could justify a low P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Is Debt Impacting Asia Allied Infrastructure Holdings's P/E?
Asia Allied Infrastructure Holdings has net debt worth a very significant 141% 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 Asia Allied Infrastructure Holdings's P/E Ratio
Asia Allied Infrastructure Holdings has a P/E of 9.3. That's around the same as the average in the HK market, which is 9.1. With significant debt and no EPS growth last year, the P/E suggests shareholders are expecting higher profit in the future.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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.
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. Thank you for reading.