This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use China Boqi Environmental (Holding) Co., Ltd.’s (HKG:2377) P/E ratio to inform your assessment of the investment opportunity. China Boqi Environmental (Holding) has a price to earnings ratio of 5.43, based on the last twelve months. That corresponds to an earnings yield of approximately 18%.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for China Boqi Environmental (Holding):
P/E of 5.43 = CN¥1.58 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.29 (Based on the trailing twelve months to June 2018.)
Is A High P/E 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
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.
China Boqi Environmental (Holding)’s earnings per share fell by 2.0% in the last twelve months. And EPS is down 7.4% a year, over the last 5 years. So you wouldn’t expect a very high P/E.
How Does China Boqi Environmental (Holding)’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 China Boqi Environmental (Holding) has a lower P/E than the average (13.1) P/E for companies in the commercial services industry.
Its relatively low P/E ratio indicates that China Boqi Environmental (Holding) shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with China Boqi Environmental (Holding), it’s quite possible it could surprise on the upside. 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
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
China Boqi Environmental (Holding)’s Balance Sheet
The extra options and safety that comes with China Boqi Environmental (Holding)’s CN¥664m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On China Boqi Environmental (Holding)’s P/E Ratio
China Boqi Environmental (Holding) trades on a P/E ratio of 5.4, which is below the HK market average of 10.2. Falling earnings per share are likely to be keeping potential buyers away, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold they key to an excellent investment decision.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.