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# Why Yue Yuen Industrial (Holdings) Limited’s (HKG:551) High P/E Ratio Isn’t Necessarily A Bad Thing

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Yue Yuen Industrial (Holdings) Limited’s (HKG:551) P/E ratio could help you assess the value on offer. Based on the last twelve months, Yue Yuen Industrial (Holdings)’s P/E ratio is 14.58. That means that at current prices, buyers pay HK\$14.58 for every HK\$1 in trailing yearly profits.

### How Do You Calculate Yue Yuen Industrial (Holdings)’s P/E Ratio?

The formula for price to earnings is:

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

Or for Yue Yuen Industrial (Holdings):

P/E of 14.58 = \$2.93 (Note: this is the share price in the reporting currency, namely, USD ) ÷ \$0.20 (Based on the year to September 2018.)

### Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each HK\$1 the company has earned over the last year. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’

### How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Yue Yuen Industrial (Holdings) saw earnings per share decrease by 38% last year. But it has grown its earnings per share by 3.2% per year over the last five years. And it has shrunk its earnings per share by 3.0% per year over the last three years. This growth rate might warrant a low P/E ratio. This growth rate might warrant a low P/E ratio.

### How Does Yue Yuen Industrial (Holdings)’s P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (10.3) for companies in the luxury industry is lower than Yue Yuen Industrial (Holdings)’s P/E.

Yue Yuen Industrial (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.

### 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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 Yue Yuen Industrial (Holdings)’s Debt Impact Its P/E Ratio?

Yue Yuen Industrial (Holdings)’s net debt is 25% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

### The Bottom Line On Yue Yuen Industrial (Holdings)’s P/E Ratio

Yue Yuen Industrial (Holdings)’s P/E is 14.6 which is above average (10.7) in the HK market. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.

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 report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Yue Yuen Industrial (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).

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.