Read This Before You Buy China State Construction International Holdings Limited (HKG:3311) Because Of Its P/E Ratio

Kelly Murphy

Mon, Feb 4, 2019, 5:40 PM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at China State Construction International Holdings Limited’s (HKG:3311) P/E ratio and reflect on what it tells us about the company’s share price. China State Construction International Holdings has a P/E ratio of 6.66, based on the last twelve months. That corresponds to an earnings yield of approximately 15%.

See our latest analysis for China State Construction International Holdings

How Do I Calculate China State Construction International Holdings’s 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 State Construction International Holdings:

P/E of 6.66 = HK$7.5 ÷ HK$1.13 (Based on the year to June 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 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

China State Construction International Holdings’s earnings per share fell by 5.8% in the last twelve months. But it has grown its earnings per share by 12% per year over the last five years.

How Does China State Construction International Holdings’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (11.1) for companies in the construction industry is higher than China State Construction International Holdings’s P/E.

This suggests that market participants think China State Construction International Holdings will underperform other companies in its industry. Since the market seems unimpressed with China State Construction International Holdings, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

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).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

China State Construction International Holdings’s Balance Sheet

China State Construction International Holdings has net debt worth 63% of its market capitalization. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On China State Construction International Holdings’s P/E Ratio

China State Construction International Holdings has a P/E of 6.7. That’s below the average in the HK market, which is 10.4. When you consider that the company has significant debt, and didn’t grow EPS last year, it isn’t surprising that the market has muted expectations.

Investors have an opportunity when market expectations about a stock are wrong. 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 visual report on analyst forecasts could hold they key to an excellent investment decision.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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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