What Does Tsaker Chemical Group Limited’s (HKG:1986) P/E Ratio Tell You?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Tsaker Chemical Group Limited’s (HKG:1986) P/E ratio could help you assess the value on offer. Tsaker Chemical Group has a price to earnings ratio of 26.73, based on the last twelve months. That means that at current prices, buyers pay HK$26.73 for every HK$1 in trailing yearly profits.
View our latest analysis for Tsaker Chemical Group
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Tsaker Chemical Group:
P/E of 26.73 = CN¥5.12 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.19 (Based on the trailing twelve months 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 isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Tsaker Chemical Group increased earnings per share by a whopping 86% last year. And it has improved its earnings per share by 3.0% per year over the last three years. I’d therefore be a little surprised if its P/E ratio was not relatively high. But earnings per share are down 6.2% per year over the last five years.
How Does Tsaker Chemical Group’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Tsaker Chemical Group has a significantly higher P/E than the average (8.6) P/E for companies in the chemicals industry.
That means that the market expects Tsaker Chemical Group will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Tsaker Chemical Group’s Balance Sheet
Tsaker Chemical Group’s net debt is 6.5% of its market cap. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Verdict On Tsaker Chemical Group’s P/E Ratio
Tsaker Chemical Group has a P/E of 26.7. That’s higher than the average in the HK market, which is 10.7. While the company does use modest debt, its recent earnings growth is impressive. So it does not seem strange that the P/E is above average.
Investors should be looking to buy stocks that the market is wrong about. 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.
