Do You Know What CITIC Dameng Holdings Limited’s (HKG:1091) P/E Ratio Means?

Ingrid Hart

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use CITIC Dameng Holdings Limited’s (HKG:1091) P/E ratio to inform your assessment of the investment opportunity. CITIC Dameng Holdings has a P/E ratio of 7.77, based on the last twelve months. That is equivalent to an earnings yield of about 13%.

Check out our latest analysis for CITIC Dameng Holdings

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 CITIC Dameng Holdings:

P/E of 7.77 = HK$0.35 ÷ HK$0.046 (Based on the year to June 2018.)

Is A High Price-to-Earnings 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 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. Earnings growth means that in the future the ‘E’ will be higher. 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.

Notably, CITIC Dameng Holdings grew EPS by a whopping 31% in the last year. And it has bolstered its earnings per share by 27% per year over the last five years. I’d therefore be a little surprised if its P/E ratio was not relatively high.

How Does CITIC Dameng Holdings’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below CITIC Dameng Holdings has a P/E ratio that is fairly close for the average for the metals and mining industry, which is 7.9.

SEHK:1091 PE PEG Gauge December 18th 18
SEHK:1091 PE PEG Gauge December 18th 18

Its P/E ratio suggests that CITIC Dameng Holdings 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. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.

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

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. 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).

Is Debt Impacting CITIC Dameng Holdings’s P/E?

CITIC Dameng Holdings’s net debt is considerable, at 268% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Bottom Line On CITIC Dameng Holdings’s P/E Ratio

CITIC Dameng Holdings trades on a P/E ratio of 7.8, which is below the HK market average of 10.6. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

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.’ Although we don’t have analyst forecasts, you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: CITIC Dameng Holdings 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).

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.