This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Zijin Mining Group Company Limited’s (HKG:2899) P/E ratio and reflect on what it tells us about the company’s share price. Zijin Mining Group has a P/E ratio of 13.47, based on the last twelve months. In other words, at today’s prices, investors are paying HK$13.47 for every HK$1 in prior year profit.
How Do I Calculate Zijin Mining Group’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 Zijin Mining Group:
P/E of 13.47 = CN¥2.78 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.21 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s nice to see that Zijin Mining Group grew EPS by a stonking 77% in the last year. And it has bolstered its earnings per share by 11% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Zijin Mining Group’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Zijin Mining Group has a higher P/E than the average (7.5) P/E for companies in the metals and mining industry.
Its relatively high P/E ratio indicates that Zijin Mining Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.
How Does Zijin Mining Group’s Debt Impact Its P/E Ratio?
Zijin Mining Group’s net debt is 39% of its market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Bottom Line On Zijin Mining Group’s P/E Ratio
Zijin Mining Group’s P/E is 13.5 which is above average (10.8) in the HK market. While the company does use modest debt, its recent earnings growth is impressive. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Zijin Mining Group. 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 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.