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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to Dalian Port (PDA) Company Limited's (HKG:2880), to help you decide if the stock is worth further research. Dalian Port (PDA) has a P/E ratio of 17.12, based on the last twelve months. That means that at current prices, buyers pay HK$17.12 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Dalian Port (PDA)
How Do You Calculate Dalian Port (PDA)'s P/E 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 Dalian Port (PDA):
P/E of 17.12 = CNY0.83 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CNY0.05 (Based on the year to September 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each CNY1 the company has earned over the last year. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Dalian Port (PDA) Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below, Dalian Port (PDA) has a higher P/E than the average company (8.4) in the infrastructure industry.
Dalian Port (PDA)'s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
It's great to see that Dalian Port (PDA) grew EPS by 11% in the last year. And its annual EPS growth rate over 3 years is 8.4%. So one might expect an above average P/E ratio. Unfortunately, earnings per share are down 1.5% a year, over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.