This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to Zijin Mining Group Company Limited’s (HKG:2899), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Zijin Mining Group has a P/E ratio of 15.76. That means that at current prices, buyers pay HK$15.76 for every HK$1 in trailing yearly profits.
How Do I Calculate Zijin Mining Group’s 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 Zijin Mining Group:
P/E of 15.76 = CN¥2.66 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.17 (Based on the trailing twelve months to March 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.
How Does Zijin Mining Group’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (8.9) for companies in the metals and mining industry is lower than Zijin Mining Group’s P/E.
Zijin Mining 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
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. Earnings growth means that in the future the ‘E’ will be higher. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Zijin Mining Group’s earnings per share grew by -7.6% in the last twelve months. And its annual EPS growth rate over 5 years is 14%.
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. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.
So What Does Zijin Mining Group’s Balance Sheet Tell Us?
Net debt is 39% of Zijin Mining Group’s market cap. While it’s worth keeping this in mind, it isn’t a worry.
The Verdict On Zijin Mining Group’s P/E Ratio
Zijin Mining Group has a P/E of 15.8. That’s higher than the average in its market, which is 10. With debt at prudent levels and improving earnings, it’s fair to say the market expects steady progress 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. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Zijin Mining 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 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. Thank you for reading.