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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we'll show how COSCO SHIPPING Ports Limited's (HKG:1199) P/E ratio could help you assess the value on offer. What is COSCO SHIPPING Ports's P/E ratio? Well, based on the last twelve months it is 9.4. In other words, at today's prices, investors are paying HK$9.4 for every HK$1 in prior year profit.
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Check out our latest analysis for COSCO SHIPPING Ports
How Do You Calculate COSCO SHIPPING Ports's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for COSCO SHIPPING Ports:
P/E of 9.4 = $0.93 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.099 (Based on the trailing twelve months to March 2019.)
Is A High P/E 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
COSCO SHIPPING Ports saw earnings per share decrease by 45% last year.
Does COSCO SHIPPING Ports Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (8.8) for companies in the infrastructure industry is roughly the same as COSCO SHIPPING Ports's P/E.
Its P/E ratio suggests that COSCO SHIPPING Ports shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. I inform my view byby checking management tenure and remuneration, among other things.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.