The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Bank of Zhengzhou Co., Ltd.’s (HKG:6196) P/E ratio and reflect on what it tells us about the company’s share price. Bank of Zhengzhou has a P/E ratio of 3.68, based on the last twelve months. That is equivalent to an earnings yield of about 27%.
How Do I Calculate Bank of Zhengzhou’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Bank of Zhengzhou:
P/E of 3.68 = CN¥3.03 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.82 (Based on the year to September 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. 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
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Bank of Zhengzhou increased earnings per share by 7.9% last year. And its annual EPS growth rate over 5 years is 7.1%.
How Does Bank of Zhengzhou’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Bank of Zhengzhou has a lower P/E than the average (6) P/E for companies in the banks industry.
This suggests that market participants think Bank of Zhengzhou will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting Bank of Zhengzhou’s P/E?
Bank of Zhengzhou has net cash of CN¥1.9b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Bank of Zhengzhou’s P/E Ratio
Bank of Zhengzhou trades on a P/E ratio of 3.7, which is below the HK market average of 10.5. Earnings improved over the last year. Also positive, the relatively strong balance sheet will allow for investment in growth. In contrast, the P/E indicates shareholders doubt that will happen!
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.
But note: Bank of Zhengzhou 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.