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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how CK Infrastructure Holdings Limited’s (

HKG:1038

) P/E ratio could help you assess the value on offer.

CK Infrastructure Holdings has a P/E ratio of 15.14

, based on the last twelve months. In other words, at today’s prices, investors are paying HK$15.14 for every HK$1 in prior year profit.

See our latest analysis for CK Infrastructure Holdings

How Do I Calculate CK Infrastructure Holdings’s Price To Earnings Ratio?

The

formula for price to earnings

is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for CK Infrastructure Holdings:

P/E of 15.14 = HK$63.35 ÷ HK$4.18 (Based on the year 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

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

CK Infrastructure Holdings’s earnings per share grew by -7.8% in the last twelve months. In contrast, EPS has decreased by 17%, annually, over 5 years.

How Does CK Infrastructure 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 CK Infrastructure Holdings has a higher P/E than the average (14.1) P/E for companies in the electric utilities industry.

SEHK:1038 PE PEG Gauge February 1st 19

That means that the market expects CK Infrastructure Holdings will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as

whether company directors have been buying shares

.

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.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does CK Infrastructure Holdings’s Debt Impact Its P/E Ratio?

CK Infrastructure Holdings has net debt worth 22% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Bottom Line On CK Infrastructure Holdings’s P/E Ratio

CK Infrastructure Holdings has a P/E of 15.1. That’s higher than the average in the HK market, which is 10.3. With modest debt relative to its size, and modest earnings growth, the market is likely expecting sustained long-term growth, if not a near-term improvement.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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.

You might be able to find a better buy than CK Infrastructure Holdings. If you want a selection of possible winners, check out this

free

list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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

[email protected]

.

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