Do You Know What Lin Horn Technology Co., Ltd.'s (GTSM:5464) P/E Ratio Means?

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 Lin Horn Technology Co., Ltd.'s (GTSM:5464) P/E ratio could help you assess the value on offer. What is Lin Horn Technology's P/E ratio? Well, based on the last twelve months it is 8.75. In other words, at today's prices, investors are paying NT$8.75 for every NT$1 in prior year profit.

Check out our latest analysis for Lin Horn Technology

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Lin Horn Technology:

P/E of 8.75 = TWD14.00 ÷ TWD1.60 (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 TWD1 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 Does Lin Horn Technology's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Lin Horn Technology has a lower P/E than the average (15.9) P/E for companies in the electronic industry.

This suggests that market participants think Lin Horn Technology will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Lin Horn Technology shrunk earnings per share by 20% over the last year. And it has shrunk its earnings per share by 2.7% per year over the last five years. This might lead to muted expectations.

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

So What Does Lin Horn Technology's Balance Sheet Tell Us?

With net cash of NT$366m, Lin Horn Technology has a very strong balance sheet, which may be important for its business. Having said that, at 37% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Lin Horn Technology's P/E Ratio

Lin Horn Technology trades on a P/E ratio of 8.8, which is below the TW market average of 17.0. Falling earnings per share are likely to be keeping potential buyers away, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary.

Investors should be looking to buy stocks that the market is wrong about. 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 you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Lin Horn Technology 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).

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.