In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at China Molybdenum Co., Ltd.'s (HKG:3993) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, China Molybdenum has a P/E ratio of 27.36. In other words, at today's prices, investors are paying HK$27.36 for every HK$1 in prior year profit.
See our latest analysis for China Molybdenum
How Do I Calculate China Molybdenum'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 China Molybdenum:
P/E of 27.36 = HK$2.22 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.08 (Based on the year to September 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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.
Does China Molybdenum Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, China Molybdenum has a higher P/E than the average company (10.6) in the metals and mining industry.
China Molybdenum's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
China Molybdenum shrunk earnings per share by 66% over the last year. But EPS is up 25% over the last 3 years. And it has shrunk its earnings per share by 6.6% per year over the last five years. This growth rate might warrant a below average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. 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.