Despite Its High P/E Ratio, Is China Greenland Broad Greenstate Group Company Limited (HKG:1253) Still Undervalued?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how China Greenland Broad Greenstate Group Company Limited’s (HKG:1253) P/E ratio could help you assess the value on offer. Based on the last twelve months, China Greenland Broad Greenstate Group’s P/E ratio is 31.98. That is equivalent to an earnings yield of about 3.1%.

See our latest analysis for China Greenland Broad Greenstate Group

How Do You Calculate A 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 China Greenland Broad Greenstate Group:

P/E of 31.98 = CN¥0.43 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.013 (Based on the trailing twelve months to June 2019.)

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.’

Does China Greenland Broad Greenstate Group 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 China Greenland Broad Greenstate Group has a higher P/E than the average (13.7) P/E for companies in the commercial services industry.

SEHK:1253 Price Estimation Relative to Market, September 5th 2019
SEHK:1253 Price Estimation Relative to Market, September 5th 2019

China Greenland Broad Greenstate Group’s P/E tells us that market participants think the company will perform better than its industry peers, going forward.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

China Greenland Broad Greenstate Group shrunk earnings per share by 62% over the last year. And EPS is down 19% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.

Remember: P/E Ratios Don’t Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Is Debt Impacting China Greenland Broad Greenstate Group’s P/E?

Net debt is 48% of China Greenland Broad Greenstate Group’s market cap. You’d want to be aware of this fact, but it doesn’t bother us.

The Verdict On China Greenland Broad Greenstate Group’s P/E Ratio

China Greenland Broad Greenstate Group’s P/E is 32 which is way above average (10.4) in its market. With some debt but no EPS growth last year, the market has high expectations of future profits.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don’t have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than China Greenland Broad Greenstate Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.