Read This Before You Buy China Nonferrous Mining Corporation Limited (HKG:1258) Because Of Its P/E Ratio

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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 China Nonferrous Mining Corporation Limited's (HKG:1258) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, China Nonferrous Mining has a P/E ratio of 4.41. That corresponds to an earnings yield of approximately 23%.

See our latest analysis for China Nonferrous Mining

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for China Nonferrous Mining:

P/E of 4.41 = $0.18 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.042 (Based on the trailing twelve months to December 2018.)

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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

China Nonferrous Mining saw earnings per share improve by -2.7% last year. And earnings per share have improved by 17% annually, over the last five years.

Does China Nonferrous Mining Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (8.5) for companies in the metals and mining industry is higher than China Nonferrous Mining's P/E.

China Nonferrous Mining's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with China Nonferrous Mining, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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 China Nonferrous Mining's Balance Sheet Tell Us?

China Nonferrous Mining's net debt is 93% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On China Nonferrous Mining's P/E Ratio

China Nonferrous Mining's P/E is 4.4 which is below average (10.9) in the HK market. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently.

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. We don't have analyst forecasts, but 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 be able to find a better stock than China Nonferrous Mining. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.