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What Is Fujian Blue Hat Interactive Entertainment Technology's (NASDAQ:BHAT) P/E Ratio After Its Share Price Tanked?

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Simply Wall St
·5 min read
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To the annoyance of some shareholders, Fujian Blue Hat Interactive Entertainment Technology (NASDAQ:BHAT) shares are down a considerable 35% in the last month. The bad news is that the recent drop obliterated the last year's worth of gains; the stock is flat over twelve months.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

View our latest analysis for Fujian Blue Hat Interactive Entertainment Technology

How Does Fujian Blue Hat Interactive Entertainment Technology's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 4.01 that sentiment around Fujian Blue Hat Interactive Entertainment Technology isn't particularly high. The image below shows that Fujian Blue Hat Interactive Entertainment Technology has a lower P/E than the average (24.2) P/E for companies in the entertainment industry.

NasdaqCM:BHAT Price Estimation Relative to Market, February 22nd 2020
NasdaqCM:BHAT Price Estimation Relative to Market, February 22nd 2020

This suggests that market participants think Fujian Blue Hat Interactive Entertainment Technology will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Fujian Blue Hat Interactive Entertainment Technology's 89% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The cherry on top is that the five year growth rate was an impressive 29% per year. So I'd be surprised if the P/E ratio was not above average.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Fujian Blue Hat Interactive Entertainment Technology's Balance Sheet

Fujian Blue Hat Interactive Entertainment Technology's net debt is 2.9% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Bottom Line On Fujian Blue Hat Interactive Entertainment Technology's P/E Ratio

Fujian Blue Hat Interactive Entertainment Technology trades on a P/E ratio of 4.0, which is below the US market average of 18.2. The company hasn't stretched its balance sheet, and earnings growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Given Fujian Blue Hat Interactive Entertainment Technology's P/E ratio has declined from 6.2 to 4.0 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

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. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Fujian Blue Hat Interactive Entertainment Technology. 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.