Read This Before You Buy Telecom Digital Holdings Limited (HKG:6033) 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 Telecom Digital Holdings Limited's (HKG:6033) P/E ratio could help you assess the value on offer. What is Telecom Digital Holdings's P/E ratio? Well, based on the last twelve months it is 8.73. That is equivalent to an earnings yield of about 11%.

Check out our latest analysis for Telecom Digital Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Telecom Digital Holdings:

P/E of 8.73 = HK$2.85 ÷ HK$0.33 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Telecom Digital Holdings Have A Relatively High Or Low P/E For Its Industry?

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 (9.5) for companies in the electronic industry is higher than Telecom Digital Holdings's P/E.

Its relatively low P/E ratio indicates that Telecom Digital 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Telecom Digital Holdings's earnings per share grew by -2.7% in the last twelve months. And it has bolstered its earnings per share by 3.9% per year over the last five years.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Telecom Digital Holdings's Debt Impact Its P/E Ratio?

Net debt totals 14% of Telecom Digital Holdings's 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 Telecom Digital Holdings's P/E Ratio

Telecom Digital Holdings's P/E is 8.7 which is below average (10.4) in the HK market. The company does have a little debt, and EPS is moving in the right direction. If you believe growth will continue - or even increase - then the low P/E may signify opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Telecom Digital 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.