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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 Jiangxi Copper Company Limited's (HKG:358) P/E ratio to inform your assessment of the investment opportunity. Jiangxi Copper has a P/E ratio of 12.47, based on the last twelve months. That is equivalent to an earnings yield of about 8.0%.
See our latest analysis for Jiangxi Copper
How Do You Calculate Jiangxi Copper's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Jiangxi Copper:
P/E of 12.47 = CN¥8.7 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.70 (Based on the trailing twelve months to March 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company 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
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, Jiangxi Copper grew EPS by a whopping 33% in the last year. And earnings per share have improved by 52% annually, over the last three years. I'd therefore be a little surprised if its P/E ratio was not relatively high. Unfortunately, earnings per share are down 3.9% a year, over 5 years.
How Does Jiangxi Copper'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. You can see in the image below that the average P/E (8.4) for companies in the metals and mining industry is lower than Jiangxi Copper's P/E.
Its relatively high P/E ratio indicates that Jiangxi Copper shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).