This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Guangdong Yueyun Transportation Company Limited's (HKG:3399), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Guangdong Yueyun Transportation has a P/E ratio of 4.73. That corresponds to an earnings yield of approximately 21.1%.

See our latest analysis for Guangdong Yueyun Transportation

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for Guangdong Yueyun Transportation:

P/E of 4.73 = CN¥1.803 ÷ CN¥0.381 (Based on the year to December 2019.)

(Note: the above calculation uses the share price in the reporting currency, namely CNY and the 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 CN¥1 of company earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

How Does Guangdong Yueyun Transportation's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. If you look at the image below, you can see Guangdong Yueyun Transportation has a lower P/E than the average (9.6) in the logistics industry classification.

Guangdong Yueyun Transportation's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Guangdong Yueyun Transportation, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Guangdong Yueyun Transportation saw earnings per share decrease by 6.8% last year. But it has grown its earnings per share by 3.6% per year over the last five years. And over the longer term (3 years) earnings per share have decreased 4.7% annually. So it would be surprising to see a high P/E.

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

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Guangdong Yueyun Transportation's Debt Impact Its P/E Ratio?

Guangdong Yueyun Transportation has net debt worth 88% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Guangdong Yueyun Transportation's P/E Ratio

Guangdong Yueyun Transportation trades on a P/E ratio of 4.7, which is below the HK market average of 8.9. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future.

Investors should be looking to buy stocks that the market is wrong about. 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 shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Guangdong Yueyun Transportation 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.