This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use China Communications Construction Company Limited’s (HKG:1800) P/E ratio to inform your assessment of the investment opportunity. China Communications Construction has a price to earnings ratio of 5.65, based on the last twelve months. In other words, at today’s prices, investors are paying HK$5.65 for every HK$1 in prior year profit.

Check out our latest analysis for China Communications Construction

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How Do I Calculate China Communications Construction’s Price To Earnings Ratio?

The formula for P/E is:

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

Or for China Communications Construction:

P/E of 5.65 = CN¥7.16 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥1.27 (Based on the trailing twelve months to September 2018.)

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 Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

It’s nice to see that China Communications Construction grew EPS by a stonking 27% in the last year. And it has bolstered its earnings per share by 9.9% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.

How Does China Communications Construction’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that China Communications Construction has a lower P/E than the average (11.4) P/E for companies in the construction industry.

This suggests that market participants think China Communications Construction will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.