Yan Tat Group Holdings (HKG:1480) shareholders are no doubt pleased to see that the share price has had a great month, posting a 33% gain, recovering from prior weakness. The full year gain of 17% is pretty reasonable, too.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock 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.
How Does Yan Tat Group Holdings's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 7.39 that sentiment around Yan Tat Group Holdings isn't particularly high. We can see in the image below that the average P/E (8.9) for companies in the electronic industry is higher than Yan Tat Group Holdings's P/E.
This suggests that market participants think Yan Tat Group Holdings 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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and 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. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Yan Tat Group Holdings maintained roughly steady earnings over the last twelve months. But EPS is up 15% over the last 3 years. And over the longer term (5 years) earnings per share have decreased 3.0% annually. So it would be surprising to see a high P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
How Does Yan Tat Group Holdings's Debt Impact Its P/E Ratio?
Yan Tat Group Holdings has net debt worth just 1.5% of its market capitalization. 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 Verdict On Yan Tat Group Holdings's P/E Ratio
Yan Tat Group Holdings's P/E is 7.4 which is below average (10.5) in the HK market. The company hasn't stretched its balance sheet, and earnings are improving. If growth is sustainable over the long term, then the current P/E ratio may be a sign of good value. What is very clear is that the market has become less pessimistic about Yan Tat Group Holdings over the last month, with the P/E ratio rising from 5.5 back then to 7.4 today. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.
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 you might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than Yan Tat Group Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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. Thank you for reading.