Despite Its High P/E Ratio, Is CK Asset Holdings Limited (HKG:1113) Still Undervalued?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to CK Asset Holdings Limited’s (HKG:1113), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, CK Asset Holdings has a P/E ratio of 6.47. That corresponds to an earnings yield of approximately 15.5%.

Check out our latest analysis for CK Asset Holdings

How Do You Calculate CK Asset Holdings’s P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for CK Asset Holdings:

P/E of 6.47 = HK$53.40 ÷ HK$8.25 (Based on the year to June 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. 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 CK Asset Holdings Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that CK Asset Holdings has a P/E ratio that is roughly in line with the real estate industry average (6.2).

SEHK:1113 Price Estimation Relative to Market, October 21st 2019
SEHK:1113 Price Estimation Relative to Market, October 21st 2019

That indicates that the market expects CK Asset Holdings will perform roughly in line with other companies in its industry.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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.

CK Asset Holdings’s earnings per share fell by 24% in the last twelve months. But EPS is up 19% over the last 3 years. The company could impress by growing EPS, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

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 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.

CK Asset Holdings’s Balance Sheet

CK Asset Holdings has net debt worth just 1.3% of its market capitalization. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Verdict On CK Asset Holdings’s P/E Ratio

CK Asset Holdings’s P/E is 6.5 which is below average (10.3) in the HK market. Since it only carries a modest debt load, it’s likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth.

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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: CK Asset Holdings 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).

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 editorial-team@simplywallst.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.