This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Genertec Universal Medical Group Company Limited’s (HKG:2666) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Genertec Universal Medical Group’s P/E ratio is 6.77. That corresponds to an earnings yield of approximately 15%.
How Do I Calculate Genertec Universal Medical Group’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 Genertec Universal Medical Group:
P/E of 6.77 = CN¥5.15 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.76 (Based on the year to June 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Genertec Universal Medical Group increased earnings per share by an impressive 23% over the last twelve months. And earnings per share have improved by 11% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
How Does Genertec Universal Medical Group’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (21.1) for companies in the healthcare industry is higher than Genertec Universal Medical Group’s P/E.
Its relatively low P/E ratio indicates that Genertec Universal Medical Group shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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).
Is Debt Impacting Genertec Universal Medical Group’s P/E?
Net debt totals a substantial 329% of Genertec Universal Medical Group’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 Verdict On Genertec Universal Medical Group’s P/E Ratio
Genertec Universal Medical Group has a P/E of 6.8. That’s below the average in the HK market, which is 10.4. The company may have significant debt, but EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Genertec Universal Medical Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 firstname.lastname@example.org.