Despite Its High P/E Ratio, Is BBI Life Sciences Corporation (HKG:1035) Still Undervalued?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how BBI Life Sciences Corporation’s (HKG:1035) P/E ratio could help you assess the value on offer. BBI Life Sciences has a P/E ratio of 17.15, based on the last twelve months. In other words, at today’s prices, investors are paying HK$17.15 for every HK$1 in prior year profit.
Check out our latest analysis for BBI Life Sciences
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for BBI Life Sciences:
P/E of 17.15 = CN¥2.27 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.13 (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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s great to see that BBI Life Sciences grew EPS by 17% in the last year. And its annual EPS growth rate over 5 years is 3.6%. This could arguably justify a relatively high P/E ratio.
How Does BBI Life Sciences’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. As you can see below BBI Life Sciences has a P/E ratio that is fairly close for the average for the biotechs industry, which is 16.3.
That indicates that the market expects BBI Life Sciences will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Remember: P/E Ratios Don’t Consider The Balance Sheet
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 BBI Life Sciences’s Debt Impact Its P/E Ratio?
BBI Life Sciences has net cash of CN¥158m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On BBI Life Sciences’s P/E Ratio
BBI Life Sciences trades on a P/E ratio of 17.2, which is above the HK market average of 10.7. With cash in the bank the company has plenty of growth options — and it is already on the right track. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: BBI Life Sciences may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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 editorial-team@simplywallst.com.
