This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios).
We’ll show how you can use Beijing Beida Jade Bird Universal Sci-Tech Company Limited’s (HKG:8095) P/E ratio to inform your assessment of the investment opportunity.
What is Beijing Beida Jade Bird Universal Sci-Tech’s P/E ratio? Well, based on the last twelve months it is 7.61.
In other words, at today’s prices, investors are paying HK$7.61 for every HK$1 in prior year profit.
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Beijing Beida Jade Bird Universal Sci-Tech:
P/E of 7.61 = CN¥0.81 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.11
(Based on the year to December 2018.)
Is A High P/E 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.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates.
Earnings growth means that in the future the ‘E’ will be higher.
Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future.
And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Beijing Beida Jade Bird Universal Sci-Tech shrunk earnings per share by 14% over the last year.
But over the longer term (5 years) earnings per share have increased by 19%.
Does Beijing Beida Jade Bird Universal Sci-Tech Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company.
The image below shows that Beijing Beida Jade Bird Universal Sci-Tech has a lower P/E than the average (13.7) P/E for companies in the software industry.
Its relatively low P/E ratio indicates that Beijing Beida Jade Bird Universal Sci-Tech shareholders think it will struggle to do as well as other companies in its industry classification.
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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.
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.
So What Does Beijing Beida Jade Bird Universal Sci-Tech’s Balance Sheet Tell Us?
Beijing Beida Jade Bird Universal Sci-Tech has net cash of CN¥456m. This is fairly high at 41% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Verdict On Beijing Beida Jade Bird Universal Sci-Tech’s P/E Ratio
Beijing Beida Jade Bird Universal Sci-Tech has a P/E of 7.6. That’s below the average in the HK market, which is 12.1.
The recent drop in earnings per share would almost certainly temper expectations,
but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity.
If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself.
We don’t have analyst forecasts, but
you might want to assess this data-rich visualization of earnings, revenue and cash flow.
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.
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.
If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.
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