Here's What Pingtan Marine Enterprise Ltd.'s (NASDAQ:PME) P/E Ratio Is Telling Us

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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 Pingtan Marine Enterprise Ltd.'s (NASDAQ:PME) P/E ratio could help you assess the value on offer. Based on the last twelve months, Pingtan Marine Enterprise's P/E ratio is 8.43. In other words, at today's prices, investors are paying $8.43 for every $1 in prior year profit.

Check out our latest analysis for Pingtan Marine Enterprise

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Pingtan Marine Enterprise:

P/E of 8.43 = $2.27 ÷ $0.27 (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 $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 Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Pingtan Marine Enterprise saw earnings per share decrease by 36% last year. But it has grown its earnings per share by 4.9% per year over the last three years. And EPS is down 34% a year, over the last 5 years. This might lead to muted expectations.

How Does Pingtan Marine Enterprise's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Pingtan Marine Enterprise has a lower P/E than the average (17.6) in the food industry classification.

Its relatively low P/E ratio indicates that Pingtan Marine Enterprise shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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. 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.

Is Debt Impacting Pingtan Marine Enterprise's P/E?

Pingtan Marine Enterprise has net debt worth 13% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Bottom Line On Pingtan Marine Enterprise's P/E Ratio

Pingtan Marine Enterprise trades on a P/E ratio of 8.4, which is below the US market average of 16.7. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this freereport on the analyst consensus forecasts could help you make a master move on this stock.

But note: Pingtan Marine Enterprise may not be the best stock to buy. So take a peek at this freelist of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.