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

To the annoyance of some shareholders, Vixtel Technologies Holdings (HKG:1782) shares are down a considerable 41% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 41% drop over twelve months.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Vixtel Technologies Holdings

How Does Vixtel Technologies Holdings's P/E Ratio Compare To Its Peers?

Vixtel Technologies Holdings's P/E of 10.43 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (13.7) for companies in the it industry is higher than Vixtel Technologies Holdings's P/E.

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

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.

Most would be impressed by Vixtel Technologies Holdings earnings growth of 23% in the last year. And earnings per share have improved by 5.5% annually, over the last three years. This could arguably justify a relatively high 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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.

How Does Vixtel Technologies Holdings's Debt Impact Its P/E Ratio?

With net cash of CN¥71m, Vixtel Technologies Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 24% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Vixtel Technologies Holdings's P/E Ratio

Vixtel Technologies Holdings's P/E is 10.4 which is about average (10.4) in the HK market. The balance sheet is healthy, and recent EPS growth impressive, but the P/E implies some caution from the market. 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 significantly less optimistic about Vixtel Technologies Holdings over the last month, with the P/E ratio falling from 17.7 back then to 10.4 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this free report on the analyst consensus forecasts could help you make a master move on this stock.

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.

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.