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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 CITIC Envirotech Ltd.’s (SGX:CEE) P/E ratio could help you assess the value on offer. Based on the last twelve months, CITIC Envirotech’s P/E ratio is 8.49. In other words, at today’s prices, investors are paying SGD8.49 for every SGD1 in prior year profit.

See our latest analysis for CITIC Envirotech

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 CITIC Envirotech:

P/E of 8.49 = SGD0.48 ÷ SGD0.057 (Based on the year to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each SGD1 of company earnings. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. 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.

CITIC Envirotech had pretty flat EPS growth in the last year. But over the longer term (5 years) earnings per share have increased by 23%.

How Does CITIC Envirotech’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that CITIC Envirotech has a lower P/E than the average (16.8) P/E for companies in the commercial services industry.

Its relatively low P/E ratio indicates that CITIC Envirotech shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with CITIC Envirotech, it’s quite possible it could surprise on the upside. 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

The ‘Price’ in P/E reflects the market capitalization of the company. 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 CITIC Envirotech’s P/E?

CITIC Envirotech has net debt worth 33% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On CITIC Envirotech’s P/E Ratio

CITIC Envirotech’s P/E is 8.5 which is below average (11.9) in the SG market. The company hasn’t stretched its balance sheet, and earnings are improving. If growth is sustainable over the long term, then the current P/E ratio may be a sign of good value.

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 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 CITIC Envirotech. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.