Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll look at BII Railway Transportation Technology Holdings Company Limited’s (HKG:1522) P/E ratio and reflect on what it tells us about the company’s share price. BII Railway Transportation Technology Holdings has a price to earnings ratio of 13.20, based on the last twelve months. In other words, at today’s prices, investors are paying HK$13.20 for every HK$1 in prior year profit.
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 BII Railway Transportation Technology Holdings:
P/E of 13.20 = HKD0.55 ÷ HKD0.04 (Based on the trailing twelve months to June 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HKD1 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 Does BII Railway Transportation Technology Holdings’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that BII Railway Transportation Technology Holdings has a P/E ratio that is roughly in line with the software industry average (12.7).
Its P/E ratio suggests that BII Railway Transportation Technology Holdings shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. 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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
In the last year, BII Railway Transportation Technology Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 117% gain was both fast and well deserved. Even better, EPS is up 72% per year over three years. So we’d absolutely expect it to have a relatively high P/E ratio. Unfortunately, earnings per share are down 1.9% a year, over 5 years.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does BII Railway Transportation Technology Holdings’s Balance Sheet Tell Us?
BII Railway Transportation Technology Holdings has net cash of HK$390m. This is fairly high at 34% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Verdict On BII Railway Transportation Technology Holdings’s P/E Ratio
BII Railway Transportation Technology Holdings trades on a P/E ratio of 13.2, which is above its market average of 10.6. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than BII Railway Transportation Technology Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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