How Does Vixtel Technologies Holdings's (HKG:1782) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the Vixtel Technologies Holdings (HKG:1782) share price has dived 36% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 42% drop over twelve months.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Vixtel Technologies Holdings

Does Vixtel Technologies Holdings Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 9.13 that sentiment around Vixtel Technologies Holdings isn't particularly high. The image below shows that Vixtel Technologies Holdings has a lower P/E than the average (13.1) P/E for companies in the it industry.

Its relatively low P/E ratio indicates that Vixtel Technologies Holdings shareholders think it will struggle to do as well as other companies in its industry classification.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

It's great to see that Vixtel Technologies Holdings grew EPS by 23% in the last year. And it has improved its earnings per share by 5.5% per year over the last three years. So one might expect an above average P/E ratio.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

So What Does Vixtel Technologies Holdings's Balance Sheet Tell Us?

Vixtel Technologies Holdings has net cash of CN¥71m. This is fairly high at 27% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Vixtel Technologies Holdings's P/E Ratio

Vixtel Technologies Holdings trades on a P/E ratio of 9.1, which is fairly close to the HK market average of 9.7. Considering its recent growth, alongside its lack of debt, it would appear that the market isn't very excited about the future. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer. What can be absolutely certain is that the market has become more pessimistic about Vixtel Technologies Holdings over the last month, with the P/E ratio falling from 14.3 back then to 9.1 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: Vixtel Technologies 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.