Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
The goal of this article is to teach you how to use 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. What is Beijing Urban Construction Design & Development Group’s P/E ratio? Well, based on the last twelve months it is 4.72. That corresponds to an earnings yield of approximately 21%.
How Do You Calculate A 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 Beijing Urban Construction Design & Development Group:
P/E of 4.72 = CN¥1.97 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.42 (Based on the trailing twelve months to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
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. When earnings grow, the ‘E’ increases, over time. 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 increased earnings per share by 7.1% last year. And it has bolstered its earnings per share by 6.8% per year over the last five years.
How Does Beijing Urban Construction Design & Development 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. The image below shows that Beijing Urban Construction Design & Development Group has a lower P/E than the average (11.1) P/E for companies in the construction industry.
Beijing Urban Construction Design & Development Group’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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. 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.
Beijing Urban Construction Design & Development Group’s Balance Sheet
Net debt is 27% of Beijing Urban Construction Design & Development Group’s market cap. You’d want to be aware of this fact, but it doesn’t bother us.
The Bottom Line On Beijing Urban Construction Design & Development Group’s P/E Ratio
Beijing Urban Construction Design & Development Group trades on a P/E ratio of 4.7, which is below the HK market average of 11. The company hasn’t stretched its balance sheet, and earnings are improving. If growth is sustainable over the long term, then the current P/E ratio may be a sign of good value.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Beijing Urban Construction Design & Development Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.