Should You Be Tempted To Sell Yue Yuen Industrial (Holdings) Limited (HKG:551) Because Of Its P/E Ratio?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Yue Yuen Industrial (Holdings) Limited’s (HKG:551) P/E ratio could help you assess the value on offer. Yue Yuen Industrial (Holdings) has a P/E ratio of 16.16, based on the last twelve months. That corresponds to an earnings yield of approximately 6.2%.

View our latest analysis for Yue Yuen Industrial (Holdings)

How Do I Calculate Yue Yuen Industrial (Holdings)’s Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for Yue Yuen Industrial (Holdings):

P/E of 16.16 = $3.24 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.20 (Based on the year to September 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 isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Yue Yuen Industrial (Holdings)’s earnings per share fell by 38% in the last twelve months. But it has grown its earnings per share by 3.2% per year over the last five years. And EPS is down 3.0% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.

How Does Yue Yuen Industrial (Holdings)’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Yue Yuen Industrial (Holdings) has a higher P/E than the average (10.1) P/E for companies in the luxury industry.

SEHK:551 PE PEG Gauge January 10th 19
SEHK:551 PE PEG Gauge January 10th 19

That means that the market expects Yue Yuen Industrial (Holdings) will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

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 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 Yue Yuen Industrial (Holdings)’s P/E?

Yue Yuen Industrial (Holdings)’s net debt is 23% of its market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Verdict On Yue Yuen Industrial (Holdings)’s P/E Ratio

Yue Yuen Industrial (Holdings)’s P/E is 16.2 which is above average (10.3) in the HK market. With some debt but no EPS growth last year, the market has high expectations of future profits.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

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.

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 editorial-team@simplywallst.com.