Is Guangzhou Automobile Group Co Ltd (HKG:2238) A Sell At Its Current PE Ratio?

2238 is currently trading at a muted trailing PE of 7.31x, somewhat lagging the Auto's average of 13.23x. However, a static multiple such as PE is never conclusive on its own. This is because there are many company-specific factors like future prospects and capital structure, which are unaccounted for. Below, I will lay out some important considerations to help determine which multiple best suits 2238. Let's dive in.

How much does 2238 earn?

PE is only used when a company is profitable, such as 2238. This is because the multiple is not applicable to companies that are not generating positive earnings. For these companies, it is possible to compare price to other fundamentals like sales or book value where applicable. In the past, 2238 has always maintained its profitability. This means an earnings-based multiple such as the PE ratio can be a useful valuation instrument, however, there may be a better option.

Does 2238 owe a lot of money?

Using debt-to-equity as a guide, 2238 does have debt on the balance sheet but it is at a prudent level at the moment. Currently, ’s debt represents 13.89% of equity, meaning that for every HK$1 you invest, the company owes HK$0.14 to debtors. This is a suitable range, however, risk associated with debt obligation still exists, as with any company with debt on the books. This isn’t an alarming amount, but investors should still proceed with caution.

Debt levels matter when valuing the business because in theory 2238’s share price represents the equity portion only, but its important to account for debt, as debt represents a liability to the owner, and it impacts the earnings capacity and risk profile of the company. By using enterprise value (EV) rather than current share price, the multiple incorporates debt, allowing us to recognise both sources of funding. This is frequently used in the EV/EBITDA multiple. The 10.65x average multiple for the industry indicates that 2238 may be priced at a discount, but at a more sobering tone than suggested by the PE ratio.

Does 2238 have a fast-growing outlook?

According to industry analyst consensus of earnings estimates, the bottom line is expected to grow by 11.89% every year for the next 5 years. This gives 2238 a relatively solid growth outlook. The issue with using current earnings in the denominator of a multiple is that it doesn’t reflect this expected growth, which is a limitation for using past (or “trailing”) values of EBITDA. Buying a stock means you’re entitled to future earnings, not the past. Therefore, it’s more useful to focus on what you’ll receive. Let’s adjust our previous multiple for future expectations by using projected EBITDA for the next year.

2238’s multiple is within reasonable range of the industry’s 6.99x. This implies a fair valuation on a forward basis, as opposed to the undervaluation indicated by the trailing EV/EBITDA ratio.

Next Steps:

Basing your investment decision based on relative valuation metrics alone is certainly no sufficient. There are many important factors I have not taken into account in this article. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
2. Past Track Record: Has been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of 's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.