Is Canvest Environmental Protection Group Company Limited’s (HKG:1381) High P/E Ratio A Problem For Investors?

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Canvest Environmental Protection Group Company Limited’s (HKG:1381) P/E ratio and reflect on what it tells us about the company’s share price. What is Canvest Environmental Protection Group’s P/E ratio? Well, based on the last twelve months it is 12.01. That is equivalent to an earnings yield of about 8.3%.

Check out our latest analysis for Canvest Environmental Protection Group

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Canvest Environmental Protection Group:

P/E of 12.01 = HK$3.69 ÷ HK$0.31 (Based on the trailing twelve months to December 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 a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Does Canvest Environmental Protection Group’s P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Canvest Environmental Protection Group has a higher P/E than the average (9.7) P/E for companies in the renewable energy industry.

SEHK:1381 Price Estimation Relative to Market, July 12th 2019
SEHK:1381 Price Estimation Relative to Market, July 12th 2019

That means that the market expects Canvest Environmental Protection Group will outperform other companies in its industry.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. 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. 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 Canvest Environmental Protection Group grew EPS by a stonking 28% in the last year. And earnings per share have improved by 29% annually, over the last five years. So we’d generally expect it to have a relatively high P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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).

While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Canvest Environmental Protection Group’s Debt Impact Its P/E Ratio?

Canvest Environmental Protection Group has net debt equal to 30% of its market cap. While that’s enough to warrant consideration, it doesn’t really concern us.

The Bottom Line On Canvest Environmental Protection Group’s P/E Ratio

Canvest Environmental Protection Group’s P/E is 12 which is above average (10.8) in its market. Its debt levels do not imperil its balance sheet and it is growing EPS strongly. So on this analysis it seems reasonable that its P/E ratio is above average.

Investors have an opportunity when market expectations about a stock are wrong. 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.

But note: Canvest Environmental Protection Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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 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.