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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at COSCO SHIPPING Holdings Co., Ltd.'s (HKG:1919) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, COSCO SHIPPING Holdings has a P/E ratio of 18.31. That is equivalent to an earnings yield of about 5.5%.
Check out our latest analysis for COSCO SHIPPING Holdings
How Do I Calculate COSCO SHIPPING Holdings's Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for COSCO SHIPPING Holdings:
P/E of 18.31 = CN¥2.6 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.14 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
COSCO SHIPPING Holdings's earnings per share fell by 43% in the last twelve months. But it has grown its earnings per share by 37% per year over the last five years.
Does COSCO SHIPPING Holdings Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that COSCO SHIPPING Holdings has a higher P/E than the average (12.2) P/E for companies in the shipping industry.
Its relatively high P/E ratio indicates that COSCO SHIPPING Holdings shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.