This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Beijing Capital International Airport Company Limited’s (HKG:694) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Beijing Capital International Airport’s P/E ratio is 11.81. That is equivalent to an earnings yield of about 8.5%.
How Do I Calculate Beijing Capital International Airport’s Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Beijing Capital International Airport:
P/E of 11.81 = CN¥7.7 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.65 (Based on the trailing twelve months to June 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
It’s nice to see that Beijing Capital International Airport grew EPS by a stonking 32% in the last year. And it has bolstered its earnings per share by 17% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.
How Does Beijing Capital International Airport’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (8.7) for companies in the infrastructure industry is lower than Beijing Capital International Airport’s P/E.
That means that the market expects Beijing Capital International Airport will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. 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
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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).
How Does Beijing Capital International Airport’s Debt Impact Its P/E Ratio?
Beijing Capital International Airport’s net debt is 5.8% of its market cap. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Bottom Line On Beijing Capital International Airport’s P/E Ratio
Beijing Capital International Airport trades on a P/E ratio of 11.8, which is above the HK market average of 10.7. The company is not overly constrained by its modest debt levels, and it is growing earnings per share. So it does not seem strange that the P/E is above average.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Beijing Capital International Airport. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org.