This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Inner Mongolia Energy Engineering Co Ltd’s (HKG:1649) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Inner Mongolia Energy Engineering’s P/E ratio is 8.09. That is equivalent to an earnings yield of about 12%.
See our latest analysis for Inner Mongolia Energy Engineering
How Do You Calculate A 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 Inner Mongolia Energy Engineering:
P/E of 8.09 = CN¥1.4 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.17 (Based on the trailing twelve months to June 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. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
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. Then, a lower P/E should attract more buyers, pushing the share price up.
Inner Mongolia Energy Engineering saw earnings per share decrease by 41% last year. But it has grown its earnings per share by 17% per year over the last five years.
How Does Inner Mongolia Energy Engineering’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 Inner Mongolia Energy Engineering has a lower P/E than the average (12.1) P/E for companies in the construction industry.
Its relatively low P/E ratio indicates that Inner Mongolia Energy Engineering 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.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.