Why Beijing Gas Blue Sky Holdings Limited’s (HKG:6828) High P/E Ratio Isn’t Necessarily A Bad Thing

Rowena Gregory

Wed, Feb 13, 2019, 7:53 PM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Beijing Gas Blue Sky Holdings Limited’s (HKG:6828) P/E ratio to inform your assessment of the investment opportunity. Beijing Gas Blue Sky Holdings has a P/E ratio of 63.34, based on the last twelve months. That means that at current prices, buyers pay HK$63.34 for every HK$1 in trailing yearly profits.

Check out our latest analysis for Beijing Gas Blue Sky Holdings

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for Beijing Gas Blue Sky Holdings:

P/E of 63.34 = HK$0.25 ÷ HK$0.0039 (Based on the year to June 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in 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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Beijing Gas Blue Sky Holdings shrunk earnings per share by 43% over the last year. But over the longer term (5 years) earnings per share have increased by 50%.

How Does Beijing Gas Blue Sky Holdings’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (18.5) for companies in the gas utilities industry is a lot lower than Beijing Gas Blue Sky Holdings’s P/E.

That means that the market expects Beijing Gas Blue Sky Holdings 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

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. 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).