In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to China Aluminum Cans Holdings Limited's (HKG:6898), to help you decide if the stock is worth further research. Based on the last twelve months, China Aluminum Cans Holdings's P/E ratio is 6.68. That corresponds to an earnings yield of approximately 15.0%.
View our latest analysis for China Aluminum Cans Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for China Aluminum Cans Holdings:
P/E of 6.68 = HK$0.54 ÷ HK$0.08 (Based on the year to June 2019.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does China Aluminum Cans Holdings Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that China Aluminum Cans Holdings has a lower P/E than the average (12.6) P/E for companies in the packaging industry.
This suggests that market participants think China Aluminum Cans Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
China Aluminum Cans Holdings increased earnings per share by a whopping 31% last year. Unfortunately, earnings per share are down 11% a year, over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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 investing in growth. That means taking on debt (or spending its cash).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does China Aluminum Cans Holdings's Debt Impact Its P/E Ratio?
China Aluminum Cans Holdings has net cash of HK$64m. This is fairly high at 13% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.