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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at PetroChina Company Limited’s (HKG:857) P/E ratio and reflect on what it tells us about the company’s share price. PetroChina has a price to earnings ratio of 13, based on the last twelve months. That means that at current prices, buyers pay HK$13 for every HK$1 in trailing yearly profits.
How Do You Calculate PetroChina’s P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for PetroChina:
P/E of 13 = CN¥3.75 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.29 (Based on the year to March 2019.)
Is A High Price-to-Earnings 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. 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.
PetroChina’s earnings made like a rocket, taking off 92% last year. Even better, EPS is up 48% per year over three years. So we’d absolutely expect it to have a relatively high P/E ratio. On the other hand, the longer term performance is poor, with EPS down 16% per year over 5 years.
How Does PetroChina’s P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that PetroChina has a higher P/E than the average (9.7) P/E for companies in the oil and gas industry.
PetroChina’s P/E tells us that market participants think the company will perform better than its industry peers, going forward.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
PetroChina’s Balance Sheet
PetroChina’s net debt equates to 27% of its market capitalization. While it’s worth keeping this in mind, it isn’t a worry.
The Verdict On PetroChina’s P/E Ratio
PetroChina has a P/E of 13. That’s higher than the average in the HK market, which is 11.1. While the company does use modest debt, its recent earnings growth is superb. So on this analysis a high P/E ratio seems reasonable.
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.
You might be able to find a better buy than PetroChina. 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 email@example.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.