This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Xinyi Solar Holdings Limited’s (HKG:968) P/E ratio and reflect on what it tells us about the company’s share price. Xinyi Solar Holdings has a price to earnings ratio of 14.6, based on the last twelve months. That corresponds to an earnings yield of approximately 6.9%.
How Do I Calculate Xinyi Solar Holdings’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Xinyi Solar Holdings:
P/E of 14.6 = HK$3.63 ÷ HK$0.25 (Based on the trailing twelve months to December 2018.)
Is A High P/E 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
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. 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.
Xinyi Solar Holdings’s earnings per share fell by 24% in the last twelve months. But it has grown its earnings per share by 26% per year over the last five years.
How Does Xinyi Solar Holdings’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (15.8) for companies in the semiconductor industry is higher than Xinyi Solar Holdings’s P/E.
This suggests that market participants think Xinyi Solar Holdings will underperform other companies in its industry. Since the market seems unimpressed with Xinyi Solar Holdings, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. 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.
Xinyi Solar Holdings’s Balance Sheet
Net debt totals 29% of Xinyi Solar Holdings’s market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.
The Bottom Line On Xinyi Solar Holdings’s P/E Ratio
Xinyi Solar Holdings has a P/E of 14.6. That’s higher than the average in the HK market, which is 10.8. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Xinyi Solar Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 email@example.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.