Here’s What Grand Ming Group Holdings Limited’s (HKG:1271) P/E Is Telling Us

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Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll apply a basic P/E ratio analysis to Grand Ming Group Holdings Limited’s (HKG:1271), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Grand Ming Group Holdings has a P/E ratio of 22.84. That is equivalent to an earnings yield of about 4.4%.

View our latest analysis for Grand Ming Group Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Grand Ming Group Holdings:

P/E of 22.84 = HK$4.88 ÷ HK$0.21 (Based on the trailing twelve months to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about 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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Grand Ming Group Holdings had pretty flat EPS growth in the last year. And over the longer term (5 years) earnings per share have decreased 4.6% annually. So we might expect a relatively low P/E.

Does Grand Ming Group Holdings Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Grand Ming Group Holdings has a higher P/E than the average (12.1) P/E for companies in the construction industry.

SEHK:1271 Price Estimation Relative to Market, May 7th 2019
SEHK:1271 Price Estimation Relative to Market, May 7th 2019

That means that the market expects Grand Ming Group Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

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

Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

Is Debt Impacting Grand Ming Group Holdings’s P/E?

Net debt totals a substantial 106% of Grand Ming Group Holdings’s market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.

The Bottom Line On Grand Ming Group Holdings’s P/E Ratio

Grand Ming Group Holdings has a P/E of 22.8. That’s higher than the average in the HK market, which is 12. With meaningful debt and only modest recent earnings growth, the market is either expecting reliable long-term growth, or a near-term improvement.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. Although we don’t have analyst forecasts, you might want to assess this data-rich visualization of earnings, revenue and cash flow.

You might be able to find a better buy than Grand Ming Group Holdings. 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.