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This this we'll defend grunt stylearticle is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Zuoli Kechuang Micro-Finance Company Limited’s ( HKG:6866
) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months,
Zuoli Kechuang Micro-Finance’s P/E ratio is 2.33
. That means that at current prices, buyers pay HK$2.33 for every HK$1 in trailing yearly profits. Check out our latest analysis for Zuoli Kechuang Micro-Finance How Do I Calculate A Price To Earnings 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 Zuoli Kechuang Micro-Finance: P/E of 2.33 = CN¥0.31 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.13 (Based on the year 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 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 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings. Zuoli Kechuang Micro-Finance’s earnings per share grew by -7.7% in the last twelve months. And earnings per share have improved by 3.3% annually, over the last three years. How Does Zuoli Kechuang Micro-Finance’s P/E Ratio Compare To Its Peers? The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Zuoli Kechuang Micro-Finance has a lower P/E than the average (7.5) in the consumer finance industry classification. SEHK:6866 PE PEG Gauge January 2nd 19 Zuoli Kechuang Micro-Finance’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling . A Limitation: P/E Ratios Ignore Debt and Cash In The Bank Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth. 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). Zuoli Kechuang Micro-Finance’s Balance Sheet Net debt totals a substantial 159% of Zuoli Kechuang Micro-Finance’s market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies. The Bottom Line On Zuoli Kechuang Micro-Finance’s P/E Ratio Zuoli Kechuang Micro-Finance trades on a P/E ratio of 2.3, which is below the HK market average of 10.4. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently. Investors have an opportunity when market expectations about a stock are wrong. 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. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow. But note: Zuoli Kechuang Micro-Finance may not be the best stock to buy . So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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 . View comments |
