Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll show how you can use Nan Nan Resources Enterprise Limited’s (HKG:1229) P/E ratio to inform your assessment of the investment opportunity. Nan Nan Resources Enterprise has a P/E ratio of 4.97, based on the last twelve months. That means that at current prices, buyers pay HK$4.97 for every HK$1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Nan Nan Resources Enterprise:
P/E of 4.97 = HKD0.18 ÷ HKD0.04 (Based on the trailing twelve months to September 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
Does Nan Nan Resources Enterprise Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that Nan Nan Resources Enterprise has a lower P/E than the average (6.9) P/E for companies in the oil and gas industry.
This suggests that market participants think Nan Nan Resources Enterprise will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
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. When earnings grow, the ‘E’ increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Nan Nan Resources Enterprise shrunk earnings per share by 43% over the last year.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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.
So What Does Nan Nan Resources Enterprise’s Balance Sheet Tell Us?
With net cash of HK$51m, Nan Nan Resources Enterprise has a very strong balance sheet, which may be important for its business. Having said that, at 34% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Nan Nan Resources Enterprise’s P/E Ratio
Nan Nan Resources Enterprise’s P/E is 5.0 which is below average (10.6) in the HK market. Falling earnings per share are likely to be keeping potential buyers away, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.
Investors have an opportunity when market expectations about a stock are wrong. 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. Although we don’t have analyst forecasts 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 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 firstname.lastname@example.org. 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.