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Here's What Chia Tai Enterprises International Limited's (HKG:3839) P/E Ratio Is Telling Us

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 Chia Tai Enterprises International Limited's (HKG:3839), to help you decide if the stock is worth further research. Chia Tai Enterprises International has a P/E ratio of 2.98, based on the last twelve months. That corresponds to an earnings yield of approximately 34%.

Check out our latest analysis for Chia Tai Enterprises International

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for Chia Tai Enterprises International:

P/E of 2.98 = $0.21 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.072 (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.

How Does Chia Tai Enterprises International's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Chia Tai Enterprises International has a lower P/E than the average (16.2) P/E for companies in the food industry.

SEHK:3839 Price Estimation Relative to Market, September 2nd 2019

Chia Tai Enterprises International's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Chia Tai Enterprises International, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Chia Tai Enterprises International saw earnings per share decrease by 24% last year. But it has grown its earnings per share by 31% per year over the last three years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

So What Does Chia Tai Enterprises International's Balance Sheet Tell Us?

Chia Tai Enterprises International has net cash of US$25m. This is fairly high at 49% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Chia Tai Enterprises International's P/E Ratio

Chia Tai Enterprises International's P/E is 3 which is below average (10.3) in the HK market. Falling earnings per share are likely to be keeping potential buyers away, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.

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. 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 Chia Tai Enterprises International. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.