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Why Zhaojin Mining Industry Company Limited's (HKG:1818) High P/E Ratio Isn't Necessarily A Bad Thing

Simply Wall St

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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Zhaojin Mining Industry Company Limited's (HKG:1818) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Zhaojin Mining Industry's P/E ratio is 47.19. That means that at current prices, buyers pay HK$47.19 for every HK$1 in trailing yearly profits.

Check out our latest analysis for Zhaojin Mining Industry

How Do You Calculate Zhaojin Mining Industry's P/E Ratio?

The formula for P/E is:

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

Or for Zhaojin Mining Industry:

P/E of 47.19 = CN¥6.95 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.15 (Based on the year to December 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. 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

Earnings growth rates have a big influence on P/E ratios. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

Zhaojin Mining Industry's earnings per share fell by 28% in the last twelve months. But it has grown its earnings per share by 12% per year over the last three years. And it has shrunk its earnings per share by 9.9% per year over the last five years. This could justify a pessimistic P/E.

Does Zhaojin Mining Industry 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. You can see in the image below that the average P/E (8.4) for companies in the metals and mining industry is a lot lower than Zhaojin Mining Industry's P/E.

SEHK:1818 Price Estimation Relative to Market, June 15th 2019

That means that the market expects Zhaojin Mining Industry will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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.

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.

Zhaojin Mining Industry's Balance Sheet

Zhaojin Mining Industry's net debt is 58% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Zhaojin Mining Industry's P/E Ratio

Zhaojin Mining Industry trades on a P/E ratio of 47.2, which is multiples above the HK market average of 10.8. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

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.

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.