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Despite Its High P/E Ratio, Is Uni-President China Holdings Ltd (HKG:220) Still Undervalued?

Simply Wall St

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 Uni-President China Holdings Ltd's (HKG:220), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, Uni-President China Holdings has a P/E ratio of 23.75. In other words, at today's prices, investors are paying HK$23.75 for every HK$1 in prior year profit.

See our latest analysis for Uni-President China Holdings

How Do You Calculate Uni-President China Holdings's P/E 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 Uni-President China Holdings:

P/E of 23.75 = HK$7.22 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.30 (Based on the year to June 2019.)

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.

Does Uni-President China Holdings Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that Uni-President China Holdings has a higher P/E than the average (15.7) P/E for companies in the food industry.

SEHK:220 Price Estimation Relative to Market, November 26th 2019

Uni-President China Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

It's nice to see that Uni-President China Holdings grew EPS by a stonking 28% in the last year. And earnings per share have improved by 9.5% annually, over the last five years. So we'd generally expect it to have a relatively high P/E ratio.

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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.

So What Does Uni-President China Holdings's Balance Sheet Tell Us?

The extra options and safety that comes with Uni-President China Holdings's CN¥2.3b net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On Uni-President China Holdings's P/E Ratio

Uni-President China Holdings trades on a P/E ratio of 23.7, which is above its market average of 10.2. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. Therefore it seems reasonable that the market would have relatively high expectations of the company

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.

Of course you might be able to find a better stock than Uni-President China Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.