A Sliding Share Price Has Us Looking At China Yongda Automobiles Services Holdings Limited's (HKG:3669) P/E Ratio
To the annoyance of some shareholders, China Yongda Automobiles Services Holdings (HKG:3669) shares are down a considerable 35% in the last month. The recent drop has obliterated the annual return, with the share price now down 10% over that longer period.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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. 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.
Check out our latest analysis for China Yongda Automobiles Services Holdings
How Does China Yongda Automobiles Services Holdings's P/E Ratio Compare To Its Peers?
China Yongda Automobiles Services Holdings's P/E of 7.18 indicates relatively low sentiment towards the stock. If you look at the image below, you can see China Yongda Automobiles Services Holdings has a lower P/E than the average (10.4) in the specialty retail industry classification.
This suggests that market participants think China Yongda Automobiles Services Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
China Yongda Automobiles Services Holdings saw earnings per share decrease by 21% last year. But over the longer term (5 years) earnings per share have increased by 8.8%.
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. 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.
Is Debt Impacting China Yongda Automobiles Services Holdings's P/E?
China Yongda Automobiles Services Holdings has net debt worth 99% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On China Yongda Automobiles Services Holdings's P/E Ratio
China Yongda Automobiles Services Holdings trades on a P/E ratio of 7.2, which is below the HK market average of 8.8. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. Given China Yongda Automobiles Services Holdings's P/E ratio has declined from 11.0 to 7.2 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 should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: China Yongda Automobiles Services Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
