Does Beijing Urban Construction Design & Development Group Co., Limited’s (HKG:1599) P/E Ratio Signal A Buying Opportunity?

Amar Chadha

Mon, Feb 11, 2019, 5:17 PM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use Beijing Urban Construction Design & Development Group Co., Limited’s (HKG:1599) P/E ratio to inform your assessment of the investment opportunity. Beijing Urban Construction Design & Development Group has a P/E ratio of 6.72, based on the last twelve months. That corresponds to an earnings yield of approximately 15%.

Check out our latest analysis for Beijing Urban Construction Design & Development Group

How Do I Calculate A 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 Beijing Urban Construction Design & Development Group:

P/E of 6.72 = CN¥2.76 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.41 (Based on the year to June 2018.)

Is A High P/E 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. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Beijing Urban Construction Design & Development Group’s earnings per share grew by -3.4% in the last twelve months. And earnings per share have improved by 7.8% annually, over the last five years.

How Does Beijing Urban Construction Design & Development Group’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 Beijing Urban Construction Design & Development Group has a lower P/E than the average (11.3) P/E for companies in the construction industry.

This suggests that market participants think Beijing Urban Construction Design & Development Group will underperform other companies in its industry. 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.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Beijing Urban Construction Design & Development Group’s Balance Sheet

Beijing Urban Construction Design & Development Group’s net debt is 9.2% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Bottom Line On Beijing Urban Construction Design & Development Group’s P/E Ratio

Beijing Urban Construction Design & Development Group’s P/E is 6.7 which is below average (10.5) in the HK market. EPS grew over the last twelve months, and debt levels are quite reasonable. The P/E ratio implies the market is cautious about longer term prospects.

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 report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Beijing Urban Construction Design & Development Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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