Yahoo Finance Despite Its High P/E Ratio, Is Zijin Mining Group Company Limited (HKG:2899) Still Undervalued?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Zijin Mining Group Company Limited’s (HKG:2899) P/E ratio to inform your assessment of the investment opportunity. Zijin Mining Group has a P/E ratio of 13.76, based on the last twelve months. That is equivalent to an earnings yield of about 7.3%.
View our latest analysis for Zijin Mining Group
How Do I Calculate Zijin Mining Group’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Zijin Mining Group:
P/E of 13.76 = CN¥2.84 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.21 (Based on the trailing twelve months to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. 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.
It’s nice to see that Zijin Mining Group grew EPS by a stonking 77% in the last year. And it has bolstered its earnings per share by 11% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Zijin Mining 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. As you can see below, Zijin Mining Group has a higher P/E than the average company (7.7) in the metals and mining industry.
That means that the market expects Zijin Mining Group will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
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.
Is Debt Impacting Zijin Mining Group’s P/E?
Zijin Mining Group’s net debt is 32% of its market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On Zijin Mining Group’s P/E Ratio
Zijin Mining Group’s P/E is 13.8 which is above average (10.9) in the HK market. The company is not overly constrained by its modest debt levels, and it is growing earnings per share. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.
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.’ So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
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. Thank you for reading.
