# Here’s How P/E Ratios Can Help Us Understand Bank of Zhengzhou Co., Ltd. (HKG:6196)

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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 Bank of Zhengzhou Co., Ltd.’s (HKG:6196), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Bank of Zhengzhou has a P/E ratio of 6.2. That means that at current prices, buyers pay HK\$6.2 for every HK\$1 in trailing yearly profits.

### How Do You Calculate Bank of Zhengzhou’s P/E Ratio?

The formula for price to earnings is:

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

Or for Bank of Zhengzhou:

P/E of 6.2 = CN¥2.7 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.44 (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 Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

Bank of Zhengzhou’s earnings per share fell by 47% in the last twelve months. And it has shrunk its earnings per share by 2.0% per year over the last five years. This might lead to muted expectations.

### How Does Bank of Zhengzhou’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Bank of Zhengzhou has a P/E ratio that is roughly in line with the banks industry average (6.1).

That indicates that the market expects Bank of Zhengzhou will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Further research into factors such asmanagement tenure, could help you form your own view on whether that is likely.

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

The ‘Price’ in P/E reflects the market capitalization of the company. 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.

### How Does Bank of Zhengzhou’s Debt Impact Its P/E Ratio?

With net cash of CN¥5.3b, Bank of Zhengzhou has a very strong balance sheet, which may be important for its business. Having said that, at 19% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

### The Bottom Line On Bank of Zhengzhou’s P/E Ratio

Bank of Zhengzhou’s P/E is 6.2 which is below average (11.3) in the HK market. The recent drop in earnings per share would almost certainly temper expectations, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary.

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.’ Although we don’t have analyst forecasts, shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

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.