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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at COSCO SHIPPING Ports Limited’s (HKG:1199) P/E ratio and reflect on what it tells us about the company’s share price. COSCO SHIPPING Ports has a price to earnings ratio of 10.96, based on the last twelve months. That is equivalent to an earnings yield of about 9.1%.
How Do I Calculate COSCO SHIPPING Ports’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for COSCO SHIPPING Ports:
P/E of 10.96 = $1.09 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.10 (Based on the year to September 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 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
COSCO SHIPPING Ports saw earnings per share decrease by 38% last year. But EPS is up 5.4% over the last 5 years.
How Does COSCO SHIPPING Ports’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 COSCO SHIPPING Ports has a higher P/E than the average (8.7) P/E for companies in the infrastructure industry.
That means that the market expects COSCO SHIPPING Ports will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Is Debt Impacting COSCO SHIPPING Ports’s P/E?
Net debt totals 52% of COSCO SHIPPING Ports’s 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 COSCO SHIPPING Ports’s P/E Ratio
COSCO SHIPPING Ports’s P/E is 11 which is about average (10.9) in the HK market. With relatively high debt, and no earnings per share growth over twelve months, the P/E suggests that many have an expectation that company will find some growth.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than COSCO SHIPPING Ports. 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 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.