Is CIMC Enric Holdings Limited’s (HKG:3899) High P/E Ratio A Problem For Investors?

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Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll show how you can use CIMC Enric Holdings Limited’s (HKG:3899) P/E ratio to inform your assessment of the investment opportunity. What is CIMC Enric Holdings’s P/E ratio? Well, based on the last twelve months it is 16.22. That corresponds to an earnings yield of approximately 6.2%.

See our latest analysis for CIMC Enric Holdings

How Do I Calculate CIMC Enric Holdings’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 CIMC Enric Holdings:

P/E of 16.22 = CN¥6.54 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.40 (Based on the trailing twelve months to December 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

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. 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.

CIMC Enric Holdings’s earnings made like a rocket, taking off 86% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 15%. Unfortunately, earnings per share are down 4.6% a year, over 5 years.

How Does CIMC Enric Holdings’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 CIMC Enric Holdings has a higher P/E than the average (9.3) P/E for companies in the machinery industry.

SEHK:3899 Price Estimation Relative to Market, May 1st 2019
SEHK:3899 Price Estimation Relative to Market, May 1st 2019

CIMC Enric Holdings’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Is Debt Impacting CIMC Enric Holdings’s P/E?

With net cash of CN¥1.7b, CIMC Enric Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 13% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On CIMC Enric Holdings’s P/E Ratio

CIMC Enric Holdings trades on a P/E ratio of 16.2, which is above the HK market average of 12. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we’d expect CIMC Enric Holdings to have a high P/E ratio.

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.’ So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: CIMC Enric Holdings 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 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.