Why Plover Bay Technologies Limited’s (HKG:1523) High P/E Ratio Isn’t Necessarily A Bad Thing
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Plover Bay Technologies Limited’s (HKG:1523) P/E ratio and reflect on what it tells us about the company’s share price. Plover Bay Technologies has a P/E ratio of 15.59, based on the last twelve months. That means that at current prices, buyers pay HK$15.59 for every HK$1 in trailing yearly profits.
Check out our latest analysis for Plover Bay Technologies
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Plover Bay Technologies:
P/E of 15.59 = $0.14 ÷ $0.0092 (Based on the trailing twelve months to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
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. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Plover Bay Technologies increased earnings per share by a whopping 40% last year.
How Does Plover Bay Technologies’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Plover Bay Technologies has a higher P/E than the average (9.2) P/E for companies in the communications industry.
Its relatively high P/E ratio indicates that Plover Bay Technologies shareholders think it will perform better than other companies in its industry classification. 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.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Plover Bay Technologies’s Balance Sheet
The extra options and safety that comes with Plover Bay Technologies’s US$21m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Plover Bay Technologies’s P/E Ratio
Plover Bay Technologies’s P/E is 15.6 which is above average (10.5) in the HK market. Its net cash position supports a higher P/E ratio, as does its solid recent earnings growth. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
