Should We Worry About Hi Sharp Electronics Co., Ltd.'s (GTSM:3128) P/E Ratio?

January 11, 2020

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Hi Sharp Electronics Co., Ltd.'s (GTSM:3128) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Hi Sharp Electronics's P/E ratio is 22.37. That corresponds to an earnings yield of approximately 4.5%.

View our latest analysis for Hi Sharp Electronics

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Hi Sharp Electronics:

P/E of 22.37 = NT$12.95 ÷ NT$0.58 (Based on the year to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each NT$1 the company has earned over the last year. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

How Does Hi Sharp Electronics's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Hi Sharp Electronics has a higher P/E than the average (15.8) P/E for companies in the electronic industry.

GTSM:3128 Price Estimation Relative to Market, January 12th 2020

Hi Sharp Electronics's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Hi Sharp Electronics's earnings per share were pretty steady over the last year. But it has grown its earnings per share by 37% per year over the last three years.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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).

So What Does Hi Sharp Electronics's Balance Sheet Tell Us?

Hi Sharp Electronics's net debt is 18% of its 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 Bottom Line On Hi Sharp Electronics's P/E Ratio

Hi Sharp Electronics's P/E is 22.4 which is above average (16.7) in its market. With modest debt relative to its size, and modest earnings growth, the market is likely expecting sustained long-term growth, if not a near-term improvement.

Investors have an opportunity when market expectations about a stock are wrong. 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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Hi Sharp Electronics. 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).

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.

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. Thank you for reading.