In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use China Communications Construction Company Limited's (HKG:1800) P/E ratio to inform your assessment of the investment opportunity. What is China Communications Construction's P/E ratio? Well, based on the last twelve months it is 4.79. That corresponds to an earnings yield of approximately 20.9%.
See our latest analysis for China Communications Construction
How Do I Calculate China Communications Construction's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for China Communications Construction:
P/E of 4.79 = HK$5.68 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$1.19 (Based on the trailing twelve months to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Does China Communications Construction'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. If you look at the image below, you can see China Communications Construction has a lower P/E than the average (9.7) in the construction industry classification.
Its relatively low P/E ratio indicates that China Communications Construction shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with China Communications Construction, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
China Communications Construction's earnings per share fell by 6.1% in the last twelve months. But it has grown its earnings per share by 6.9% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.