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Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Zijin Mining Group Company Limited's (HKG:2899) P/E ratio to inform your assessment of the investment opportunity. Zijin Mining Group has a price to earnings ratio of 16.40, based on the last twelve months. That is equivalent to an earnings yield of about 6.1%.
Check out our latest analysis for Zijin Mining Group
How Do You Calculate Zijin Mining Group's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Zijin Mining Group:
P/E of 16.40 = HK$2.44 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.15 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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 Zijin Mining Group 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. You can see in the image below that the average P/E (10.3) for companies in the metals and mining industry is lower than Zijin Mining Group's P/E.
Zijin Mining Group's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Zijin Mining Group's earnings per share fell by 24% in the last twelve months. But EPS is up 8.6% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.