Here's What Pingtan Marine Enterprise Ltd.'s (NASDAQ:PME) P/E Ratio Is Telling Us

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Pingtan Marine Enterprise Ltd.'s (NASDAQ:PME) P/E ratio and reflect on what it tells us about the company's share price. What is Pingtan Marine Enterprise's P/E ratio? Well, based on the last twelve months it is 13.91. In other words, at today's prices, investors are paying $13.91 for every $1 in prior year profit.

See our latest analysis for Pingtan Marine Enterprise

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Pingtan Marine Enterprise:

P/E of 13.91 = $1.000 ÷ $0.072 (Based on the year to December 2019.)

(Note: the above calculation results may not be precise due to rounding.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.

Does Pingtan Marine Enterprise Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Pingtan Marine Enterprise has a lower P/E than the average (17.9) P/E for companies in the food industry.

Pingtan Marine Enterprise's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Pingtan Marine Enterprise's earnings per share fell by 58% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 42% annually. This could justify a pessimistic P/E.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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).

Is Debt Impacting Pingtan Marine Enterprise's P/E?

Pingtan Marine Enterprise has net debt worth a very significant 275% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Bottom Line On Pingtan Marine Enterprise's P/E Ratio

Pingtan Marine Enterprise's P/E is 13.9 which is about average (13.0) in the US market. With meaningful debt, and no earnings per share growth last year, even an average P/E indicates that the market a significant improvement from the business.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Pingtan Marine Enterprise may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.