To the annoyance of some shareholders, VBG International Holdings (HKG:8365) shares are down a considerable 33% in the last month. Even longer term holders have taken a real hit with the stock declining 28% in the last year.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Does VBG International Holdings Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 13.54 that there is some investor optimism about VBG International Holdings. You can see in the image below that the average P/E (12.2) for companies in the capital markets industry is lower than VBG International Holdings's P/E.
VBG International Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
VBG International Holdings's earnings per share fell by 31% in the last twelve months. And over the longer term (3 years) earnings per share have decreased 16% annually. This might lead to low expectations.
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. 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.
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.
How Does VBG International Holdings's Debt Impact Its P/E Ratio?
With net cash of HK$64m, VBG International Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 39% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On VBG International Holdings's P/E Ratio
VBG International Holdings has a P/E of 13.5. That's higher than the average in its market, which is 10.3. The recent drop in earnings per share might keep value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will. Given VBG International Holdings's P/E ratio has declined from 20.2 to 13.5 in the last month, we know for sure that the market is significantly less confident 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 a contrarian, it may signal opportunity.
Investors have an opportunity when market expectations about a stock are wrong. 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. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than VBG International Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
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