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 Bestway Global Holding Inc.'s (HKG:3358) P/E ratio to inform your assessment of the investment opportunity. Bestway Global Holding has a price to earnings ratio of 7.76, based on the last twelve months. That is equivalent to an earnings yield of about 12.9%.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Bestway Global Holding:
P/E of 7.76 = HK$0.38 (Note: this is the share price in the reporting currency, namely, USD ) ÷ HK$0.05 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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 Bestway Global Holding 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. As you can see below Bestway Global Holding has a P/E ratio that is fairly close for the average for the leisure industry, which is 7.8.
Bestway Global Holding's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Bestway Global Holding actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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.
Bestway Global Holding's earnings per share fell by 3.0% in the last twelve months. But EPS is up 36% over the last 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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 Bestway Global Holding's Debt Impact Its P/E Ratio?
Bestway Global Holding has net debt equal to 43% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Bestway Global Holding's P/E Ratio
Bestway Global Holding's P/E is 7.8 which is below average (10.1) in the HK market. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth.
Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Bestway Global Holding. 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).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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.