The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). 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. What is Sinopec Kantons Holdings’s P/E ratio? Well, based on the last twelve months it is 5.53. In other words, at today’s prices, investors are paying HK$5.53 for every HK$1 in prior year profit.
Check out our latest analysis for Sinopec Kantons Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Sinopec Kantons Holdings:
P/E of 5.53 = HK$2.860 ÷ HK$0.517 (Based on the trailing twelve months to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
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. 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 Does Sinopec Kantons Holdings’s P/E Ratio Compare To Its Peers?
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 Sinopec Kantons Holdings has a P/E ratio that is fairly close for the average for the oil and gas industry, which is 5.8.
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. I would further inform my view by checking insider buying and selling., among other things.
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. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Sinopec Kantons Holdings had pretty flat EPS growth in the last year. But it has grown its earnings per share by 4.8% per year over the last five years.
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. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Sinopec Kantons Holdings’s Debt Impact Its P/E Ratio?
Net debt is 33% of Sinopec Kantons Holdings’s market cap. While that’s enough to warrant consideration, it doesn’t really concern us.
The Bottom Line On Sinopec Kantons Holdings’s P/E Ratio
Sinopec Kantons Holdings’s P/E is 5.5 which is below average (9.3) in the HK market. The company does have a little debt, and EPS is moving in the right direction. The P/E ratio implies the market is cautious about longer term prospects.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.
But note: Sinopec Kantons Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.