Does China Dredging Environment Protection Holdings Limited (HKG:871) Have A Good P/E Ratio?

Simply Wall St.

Tue, Nov 20, 2018, 11:27 PM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at China Dredging Environment Protection Holdings Limited’s (HKG:871) P/E ratio and reflect on what it tells us about the company’s share price. China Dredging Environment Protection Holdings has a price to earnings ratio of 5.46, based on the last twelve months. That means that at current prices, buyers pay HK$5.46 for every HK$1 in trailing yearly profits.

See our latest analysis for China Dredging Environment Protection Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for China Dredging Environment Protection Holdings:

P/E of 5.46 = CN¥0.14 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.026 (Based on the trailing twelve months to June 2018.)

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. 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 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

China Dredging Environment Protection Holdings’s earnings per share fell by 39% in the last twelve months. But EPS is up 55% over the last 3 years. And it has shrunk its earnings per share by 38% per year over the last five years. This might lead to muted expectations.

How Does China Dredging Environment Protection Holdings’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that China Dredging Environment Protection Holdings has a lower P/E than the average (8.4) P/E for companies in the infrastructure industry.

Its relatively low P/E ratio indicates that China Dredging Environment Protection Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, 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. 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.

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.

How Does China Dredging Environment Protection Holdings’s Debt Impact Its P/E Ratio?

China Dredging Environment Protection Holdings’s net debt is considerable, at 262% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.

The Verdict On China Dredging Environment Protection Holdings’s P/E Ratio

China Dredging Environment Protection Holdings trades on a P/E ratio of 5.5, which is below the HK market average of 10.7. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.

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. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than China Dredging Environment Protection Holdings. 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.

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