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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Dalian Port (PDA) Company Limited's (HKG:2880) P/E ratio to inform your assessment of the investment opportunity. Dalian Port (PDA) has a price to earnings ratio of 17.48, based on the last twelve months. In other words, at today's prices, investors are paying HK$17.48 for every HK$1 in prior year profit.
See our latest analysis for Dalian Port (PDA)
How Do You Calculate Dalian Port (PDA)'s P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Dalian Port (PDA):
P/E of 17.48 = CN¥0.91 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.052 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
Dalian Port (PDA)'s 137% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 4.3%. Unfortunately, earnings per share are down 3.3% a year, over 5 years.
Does Dalian Port (PDA) 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 Dalian Port (PDA) has a higher P/E than the average (8.6) P/E for companies in the infrastructure industry.
Its relatively high P/E ratio indicates that Dalian Port (PDA) shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and 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. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.