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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 look at China Nuclear Energy Technology Corporation Limited’s (HKG:611) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, China Nuclear Energy Technology’s P/E ratio is 7.85. In other words, at today’s prices, investors are paying HK$7.85 for every HK$1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for China Nuclear Energy Technology:
P/E of 7.85 = HK$0.70 ÷ HK$0.089 (Based on the trailing twelve months to June 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 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
China Nuclear Energy Technology increased earnings per share by 9.4% last year. And it has bolstered its earnings per share by 76% per year over the last five years.
How Does China Nuclear Energy Technology’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see China Nuclear Energy Technology has a lower P/E than the average (11.5) in the construction industry classification.
China Nuclear Energy Technology’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with China Nuclear Energy Technology, it’s quite possible it could surprise on the upside. You 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. 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).
China Nuclear Energy Technology’s Balance Sheet
China Nuclear Energy Technology’s net debt is considerable, at 146% of its 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 China Nuclear Energy Technology’s P/E Ratio
China Nuclear Energy Technology trades on a P/E ratio of 7.8, which is below the HK market average of 10.6. It’s good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations.
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.’ We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than China Nuclear Energy Technology. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org.