Is Bank of Tianjin Co., Ltd.’s (HKG:1578) P/E Ratio Really That Good? – Yahoo Finance

Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll apply a basic P/E ratio analysis to Bank of Tianjin Co., Ltd.’s (HKG:1578), to help you decide if the stock is worth further research. Based on the last twelve months, Bank of Tianjin’s P/E ratio is 3.78. That corresponds to an earnings yield of approximately 26.4%.

View our latest analysis for Bank of Tianjin

How Do I Calculate Bank of Tianjin’s 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 Bank of Tianjin:

P/E of 3.78 = CN¥2.836 ÷ CN¥0.750 (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?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.

Does Bank of Tianjin Have A Relatively High Or Low P/E For Its Industry?

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 Bank of Tianjin has a lower P/E than the average (5.3) in the banks industry classification.

This suggests that market participants think Bank of Tianjin will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Bank of Tianjin increased earnings per share by 8.9% last year. In contrast, EPS has decreased by 3.2%, annually, over 5 years.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

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 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 Bank of Tianjin’s Balance Sheet Tell Us?

Bank of Tianjin has net debt worth a very significant 137% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Verdict On Bank of Tianjin’s P/E Ratio

Bank of Tianjin has a P/E of 3.8. That’s below the average in the HK market, which is 8.5. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.