Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Xiangxing International Holding Limited's (HKG:1732) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Xiangxing International Holding has a P/E ratio of 9.77. That means that at current prices, buyers pay HK$9.77 for every HK$1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Xiangxing International Holding:
P/E of 9.77 = HK$0.26 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.03 (Based on the year to June 2019.)
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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Xiangxing International Holding Have A Relatively High Or Low P/E For Its Industry?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Xiangxing International Holding has a lower P/E than the average (13.2) in the shipping industry classification.
Its relatively low P/E ratio indicates that Xiangxing International Holding shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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. Earnings growth means that in the future the 'E' will be higher. 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.
Xiangxing International Holding's earnings made like a rocket, taking off 85% last year. And earnings per share have improved by 89% annually, over the last three years. So you might say it really deserves to have an above-average P/E ratio.
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. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting Xiangxing International Holding's P/E?
With net cash of CN¥33m, Xiangxing International Holding has a very strong balance sheet, which may be important for its business. Having said that, at 13% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Xiangxing International Holding's P/E Ratio
Xiangxing International Holding has a P/E of 9.8. That's around the same as the average in the HK market, which is 10.5. Its net cash position is the cherry on top of its superb EPS growth. So at a glance we're a bit surprised that Xiangxing International Holding does not have a higher P/E ratio.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.
You might be able to find a better buy than Xiangxing International Holding. 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).
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.
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