Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Sinopec Kantons Holdings Limited's (HKG:934) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Sinopec Kantons Holdings's P/E ratio is 6.35. That means that at current prices, buyers pay HK$6.35 for every HK$1 in trailing yearly profits.

View our latest analysis for Sinopec Kantons Holdings

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Sinopec Kantons Holdings:

P/E of 6.35 = HK$3.15 ÷ HK$0.50 (Based on the year to June 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Does Sinopec Kantons 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 (6.7) for companies in the oil and gas industry is roughly the same as Sinopec Kantons Holdings's P/E.

That indicates that the market expects Sinopec Kantons Holdings will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

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. Earnings growth means that in the future the 'E' will be higher. 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.

Sinopec Kantons Holdings's earnings per share fell by 2.1% in the last twelve months. But it has grown its earnings per share by 14% per year over the last five years.

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

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting Sinopec Kantons Holdings's P/E?

Sinopec Kantons Holdings has net debt equal to 33% of its market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Sinopec Kantons Holdings's P/E Ratio

Sinopec Kantons Holdings's P/E is 6.3 which is below average (10.2) in the HK market. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.