Don't Sell Dynagreen Environmental Protection Group Co., Ltd. (HKG:1330) Before You Read This

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Dynagreen Environmental Protection Group Co., Ltd.'s (HKG:1330) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Dynagreen Environmental Protection Group's P/E ratio is 13.32. That corresponds to an earnings yield of approximately 7.5%.

View our latest analysis for Dynagreen Environmental Protection Group

How Do You Calculate Dynagreen Environmental Protection Group's P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for Dynagreen Environmental Protection Group:

P/E of 13.32 = CN¥3.31 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.25 (Based on the trailing twelve months to March 2019.)

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.

Does Dynagreen Environmental Protection Group Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below Dynagreen Environmental Protection Group has a P/E ratio that is fairly close for the average for the commercial services industry, which is 12.8.

Its P/E ratio suggests that Dynagreen Environmental Protection Group shareholders think that in the future it will perform about the same as other companies in its industry classification.

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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Most would be impressed by Dynagreen Environmental Protection Group earnings growth of 20% in the last year. And it has bolstered its earnings per share by 9.9% per year over the last five years. With that performance, you might expect an above average P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

How Does Dynagreen Environmental Protection Group's Debt Impact Its P/E Ratio?

Dynagreen Environmental Protection Group's net debt is 56% of its market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On Dynagreen Environmental Protection Group's P/E Ratio

Dynagreen Environmental Protection Group's P/E is 13.3 which is above average (10) in its market. It's good to see the recent earnings growth, although we note the company uses debt already. The relatively high P/E ratio suggests shareholders think growth will continue.

Investors should be looking to buy stocks that the market is wrong about. 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.

You might be able to find a better buy than Dynagreen Environmental Protection Group. 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.