Is COSCO SHIPPING Energy Transportation Co., Ltd.'s (HKG:1138) High P/E Ratio A Problem For Investors?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to COSCO SHIPPING Energy Transportation Co., Ltd.'s (HKG:1138), to help you decide if the stock is worth further research. What is COSCO SHIPPING Energy Transportation's P/E ratio? Well, based on the last twelve months it is 14.16. In other words, at today's prices, investors are paying HK$14.16 for every HK$1 in prior year profit.

View our latest analysis for COSCO SHIPPING Energy Transportation

How Do I Calculate COSCO SHIPPING Energy Transportation's 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 COSCO SHIPPING Energy Transportation:

P/E of 14.16 = HK$3.37 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.24 (Based on the trailing twelve months to September 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. 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 Does COSCO SHIPPING Energy Transportation's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below, COSCO SHIPPING Energy Transportation has a higher P/E than the average company (6.9) in the oil and gas industry.

COSCO SHIPPING Energy Transportation'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 further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

COSCO SHIPPING Energy Transportation's earnings made like a rocket, taking off 287% last year. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Is Debt Impacting COSCO SHIPPING Energy Transportation's P/E?

Net debt totals a substantial 120% of COSCO SHIPPING Energy Transportation's 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 COSCO SHIPPING Energy Transportation's P/E Ratio

COSCO SHIPPING Energy Transportation's P/E is 14.2 which is above average (10.6) in its market. Its meaningful level of debt should warrant a lower P/E ratio, but the fast EPS growth is a positive. So it seems likely the market is overlooking the debt because of the fast earnings growth.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

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.

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.

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. Thank you for reading.