In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Zhengzhou Coal Mining Machinery Group Company Limited’s (HKG:564) P/E ratio and reflect on what it tells us about the company’s share price. Zhengzhou Coal Mining Machinery Group has a price to earnings ratio of 8.36, based on the last twelve months. In other words, at today’s prices, investors are paying HK$8.36 for every HK$1 in prior year profit.
See our latest analysis for Zhengzhou Coal Mining Machinery Group
How Do You Calculate Zhengzhou Coal Mining Machinery 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 Zhengzhou Coal Mining Machinery Group:
P/E of 8.36 = CN¥3.15 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.38 (Based on the trailing twelve months to September 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 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s nice to see that Zhengzhou Coal Mining Machinery Group grew EPS by a stonking 152% in the last year. And its annual EPS growth rate over 3 years is 93%. So we’d generally expect it to have a relatively high P/E ratio. Unfortunately, earnings per share are down 22% a year, over 5 years.
How Does Zhengzhou Coal Mining Machinery Group’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (9.1) for companies in the machinery industry is higher than Zhengzhou Coal Mining Machinery Group’s P/E.
Zhengzhou Coal Mining Machinery Group’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.