Is Beijing Urban Construction Design & Development Group Co., Limited’s (HKG:1599) P/E Ratio Really That Good?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Beijing Urban Construction Design & Development Group Co., Limited’s (HKG:1599) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Beijing Urban Construction Design & Development Group has a P/E ratio of 4.18. That corresponds to an earnings yield of approximately 24%.

View our latest analysis for Beijing Urban Construction Design & Development Group

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Beijing Urban Construction Design & Development Group:

P/E of 4.18 = CN¥1.87 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.45 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

Does Beijing Urban Construction Design & Development 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. If you look at the image below, you can see Beijing Urban Construction Design & Development Group has a lower P/E than the average (10.3) in the construction industry classification.

SEHK:1599 Price Estimation Relative to Market, September 13th 2019
SEHK:1599 Price Estimation Relative to Market, September 13th 2019

Its relatively low P/E ratio indicates that Beijing Urban Construction Design & Development Group shareholders think it will struggle to do as well as other companies in its industry classification.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Beijing Urban Construction Design & Development Group’s earnings per share grew by -9.1% in the last twelve months. And earnings per share have improved by 7.2% annually, over the last five years.

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. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

So What Does Beijing Urban Construction Design & Development Group’s Balance Sheet Tell Us?

Net debt totals 71% of Beijing Urban Construction Design & Development Group’s 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 Beijing Urban Construction Design & Development Group’s P/E Ratio

Beijing Urban Construction Design & Development Group has a P/E of 4.2. That’s below the average in the HK market, which is 10.5. While the recent EPS growth is a positive, the significant amount of debt on the balance sheet may be contributing to pessimistic market expectations.

Investors have an opportunity when market expectations about a stock are wrong. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Beijing Urban Construction Design & Development Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.