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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 Jiangxi Copper Company Limited’s (HKG:358) P/E ratio to inform your assessment of the investment opportunity. Jiangxi Copper has a P/E ratio of 13.87, based on the last twelve months. That corresponds to an earnings yield of approximately 7.2%.
Check out our latest analysis for Jiangxi Copper
How Do I Calculate Jiangxi Copper’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 Jiangxi Copper:
P/E of 13.87 = CN¥8.17 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.59 (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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. 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.
Notably, Jiangxi Copper grew EPS by a whopping 47% in the last year. And its annual EPS growth rate over 3 years is 36%. I’d therefore be a little surprised if its P/E ratio was not relatively high. But earnings per share are down 24% per year over the last five years.
How Does Jiangxi Copper’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Jiangxi Copper has a higher P/E than the average company (7.9) in the metals and mining industry.
That means that the market expects Jiangxi Copper will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).