This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Yuexiu Transport Infrastructure Limited’s (HKG:1052) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Yuexiu Transport Infrastructure’s P/E ratio is 8.8. In other words, at today’s prices, investors are paying HK$8.8 for every HK$1 in prior year profit.
How Do I Calculate Yuexiu Transport Infrastructure’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Yuexiu Transport Infrastructure:
P/E of 8.8 = CN¥5.54 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.63 (Based on the trailing twelve months to December 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. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Yuexiu Transport Infrastructure increased earnings per share by an impressive 11% over the last twelve months. And its annual EPS growth rate over 5 years is 14%. This could arguably justify a relatively high P/E ratio.
How Does Yuexiu Transport Infrastructure’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 Yuexiu Transport Infrastructure has a P/E ratio that is roughly in line with the infrastructure industry average (9.4).
That indicates that the market expects Yuexiu Transport Infrastructure will perform roughly in line with other companies in its industry. So if Yuexiu Transport Infrastructure actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
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. 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 investing in growth. That means taking on debt (or spending its 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.
Is Debt Impacting Yuexiu Transport Infrastructure’s P/E?
Yuexiu Transport Infrastructure’s net debt is 56% of its market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On Yuexiu Transport Infrastructure’s P/E Ratio
Yuexiu Transport Infrastructure’s P/E is 8.8 which is below average (12) in the HK market. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
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. 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.
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.
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 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. Thank you for reading.