This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Bortex Global Limited's (HKG:8118) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Bortex Global has a P/E ratio of 8.04. That means that at current prices, buyers pay HK$8.04 for every HK$1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Bortex Global:
P/E of 8.04 = HKD0.40 ÷ HKD0.05 (Based on the year to October 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 isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does Bortex Global 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 Bortex Global has a lower P/E than the average (9.2) P/E for companies in the electrical industry.
This suggests that market participants think Bortex Global 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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. 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.
Bortex Global's earnings made like a rocket, taking off 277% last year. Unfortunately, earnings per share are down 2.4% a year, over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. 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.
How Does Bortex Global's Debt Impact Its P/E Ratio?
The extra options and safety that comes with Bortex Global's HK$8.8m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Bortex Global's P/E Ratio
Bortex Global has a P/E of 8.0. That's below the average in the HK market, which is 10.5. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but 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 Bortex Global. 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 firstname.lastname@example.org. 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.
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