This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll show how you can use China Distance Education Holdings Limited's (NYSE:DL) P/E ratio to inform your assessment of the investment opportunity. China Distance Education Holdings has a P/E ratio of 14.39, based on the last twelve months. That corresponds to an earnings yield of approximately 6.9%.
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for China Distance Education Holdings:
P/E of 14.39 = $7.560 ÷ $0.525 (Based on the trailing twelve months to December 2019.)
(Note: the above calculation results may not be precise due to rounding.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each $1 of company earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does China Distance Education Holdings Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (24.9) for companies in the consumer services industry is higher than China Distance Education Holdings's P/E.
Its relatively low P/E ratio indicates that China Distance Education Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with China Distance Education Holdings, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
China Distance Education Holdings increased earnings per share by a whopping 30% last year. But earnings per share are down 5.4% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
How Does China Distance Education Holdings's Debt Impact Its P/E Ratio?
China Distance Education Holdings has net cash of US$96m. This is fairly high at 38% 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 Bottom Line On China Distance Education Holdings's P/E Ratio
China Distance Education Holdings trades on a P/E ratio of 14.4, which is fairly close to the US market average of 14.3. Considering its recent growth, alongside its lack of debt, it would appear that the market isn't very excited about the future. Given analysts are expecting further growth, I am a little surprised the P/E ratio is not higher. That may be worth further research.
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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: China Distance Education 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).
If you spot an error that warrants correction, please contact the editor at email@example.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.
If you decide to trade China Distance Education Holdings, use the lowest-cost* platform that is rated #1 Overall by Barron's, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.