Despite Its High P/E Ratio, Is Zhong Hua International Holdings Limited (HKG:1064) Still Undervalued?
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Zhong Hua International Holdings Limited’s (HKG:1064) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Zhong Hua International Holdings’s P/E ratio is 5.53. That means that at current prices, buyers pay HK$5.53 for every HK$1 in trailing yearly profits.
View our latest analysis for Zhong Hua International Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Zhong Hua International Holdings:
P/E of 5.53 = HK$0.19 ÷ HK$0.034 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings 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 even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Zhong Hua International Holdings’s earnings per share fell by 64% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 14%.
How Does Zhong Hua International 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 Zhong Hua International Holdings has a P/E ratio that is roughly in line with the real estate industry average (5.3).
Its P/E ratio suggests that Zhong Hua International Holdings shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. I inform my view byby checking management tenure and remuneration, among other things.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining 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.
Zhong Hua International Holdings’s Balance Sheet
Zhong Hua International Holdings has net debt worth 15% 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 Verdict On Zhong Hua International Holdings’s P/E Ratio
Zhong Hua International Holdings has a P/E of 5.5. That’s below the average in the HK market, which is 10.6. With only modest debt, it’s likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don’t have analyst forecasts, shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Zhong Hua International Holdings. 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 editorial-team@simplywallst.com.
