This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how CITIC Telecom International Holdings Limited’s (HKG:1883) P/E ratio could help you assess the value on offer. Based on the last twelve months, CITIC Telecom International Holdings’s P/E ratio is 9.76. In other words, at today’s prices, investors are paying HK$9.76 for every HK$1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for CITIC Telecom International Holdings:
P/E of 9.76 = HK$2.52 ÷ HK$0.26 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings 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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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.
CITIC Telecom International Holdings maintained roughly steady earnings over the last twelve months. But EPS is up 3.7% over the last 3 years. And over the longer term (5 years) earnings per share have decreased 5.9% annually. So we might expect a relatively low P/E.
How Does CITIC Telecom International Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that CITIC Telecom International Holdings has a lower P/E than the average (14) P/E for companies in the telecom industry.
CITIC Telecom International Holdings’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 CITIC Telecom International Holdings, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
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. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does CITIC Telecom International Holdings’s Debt Impact Its P/E Ratio?
CITIC Telecom International Holdings’s net debt is 66% 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 CITIC Telecom International Holdings’s P/E Ratio
CITIC Telecom International Holdings trades on a P/E ratio of 9.8, which is below the HK market average of 10.7. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than CITIC Telecom International Holdings. 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).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.