What Does ENN Energy Holdings Limited's (HKG:2688) P/E Ratio Tell You?

Simply Wall St

Sat, Jun 29, 2019, 6:31 PM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to ENN Energy Holdings Limited's (HKG:2688), to help you decide if the stock is worth further research. What is ENN Energy Holdings's P/E ratio? Well, based on the last twelve months it is 26.07. That corresponds to an earnings yield of approximately 3.8%.

See our latest analysis for ENN Energy Holdings

How Do I Calculate ENN Energy Holdings's 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 ENN Energy Holdings:

P/E of 26.07 = CN¥66.82 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥2.56 (Based on the year to December 2018.)

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 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. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

ENN Energy Holdings shrunk earnings per share by 1.0% last year. But EPS is up 17% over the last 5 years.

How Does ENN Energy Holdings's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (17.3) for companies in the gas utilities industry is lower than ENN Energy Holdings's P/E.

SEHK:2688 Price Estimation Relative to Market, June 30th 2019

Its relatively high P/E ratio indicates that ENN Energy 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.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.