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Why China Molybdenum Co., Ltd.'s (HKG:3993) High P/E Ratio Isn't Necessarily A Bad Thing

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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at China Molybdenum Co., Ltd.'s (HKG:3993) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, China Molybdenum has a P/E ratio of 27.36. In other words, at today's prices, investors are paying HK$27.36 for every HK$1 in prior year profit.

See our latest analysis for China Molybdenum

How Do I Calculate China Molybdenum's Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for China Molybdenum:

P/E of 27.36 = HK$2.22 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.08 (Based on the year to September 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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.

Does China Molybdenum Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, China Molybdenum has a higher P/E than the average company (10.6) in the metals and mining industry.

SEHK:3993 Price Estimation Relative to Market, November 15th 2019
SEHK:3993 Price Estimation Relative to Market, November 15th 2019

China Molybdenum's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

China Molybdenum shrunk earnings per share by 66% over the last year. But EPS is up 25% over the last 3 years. And it has shrunk its earnings per share by 6.6% per year over the last five years. This growth rate might warrant a below average P/E ratio.

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. 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 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.

How Does China Molybdenum's Debt Impact Its P/E Ratio?

Net debt is 31% of China Molybdenum's market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On China Molybdenum's P/E Ratio

China Molybdenum trades on a P/E ratio of 27.4, which is above its market average of 10.3. With some debt but no EPS growth last year, the market has high expectations of future profits.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 the key to an excellent investment decision.

Of course you might be able to find a better stock than China Molybdenum. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.