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 Datang Environment Industry Group Co., Ltd.’s (HKG:1272) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Datang Environment Industry Group’s P/E ratio is 5.86. That corresponds to an earnings yield of approximately 17%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Datang Environment Industry Group:
P/E of 5.86 = CN¥1.75 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.30 (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 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
Earnings growth rates have a big influence on P/E ratios. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Datang Environment Industry Group shrunk earnings per share by 8.7% last year. And EPS is down 12% a year, over the last 5 years. So we might expect a relatively low P/E.
How Does Datang Environment Industry 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 Datang Environment Industry Group has a lower P/E than the average (12.9) P/E for companies in the commercial services industry.
Its relatively low P/E ratio indicates that Datang Environment Industry Group shareholders think it will struggle to do as well as other companies in its industry classification. 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. That means it doesn’t take debt or cash into account. 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.
Datang Environment Industry Group’s Balance Sheet
Net debt totals 59% of Datang Environment Industry Group’s market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On Datang Environment Industry Group’s P/E Ratio
Datang Environment Industry Group has a P/E of 5.9. That’s below the average in the HK market, which is 10.3. When you consider that the company has significant debt, and didn’t grow EPS last year, it isn’t surprising that the market has muted 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.’ Although we don’t have analyst forecasts, you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Datang Environment Industry Group. 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 email@example.com.