Should You Be Tempted To Sell China Xiangtai Food Co., Ltd. (NASDAQ:PLIN) Because Of Its P/E Ratio?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at China Xiangtai Food Co., Ltd.’s (NASDAQ:PLIN) P/E ratio and reflect on what it tells us about the company’s share price. Looking at earnings over the last twelve months, China Xiangtai Food has a P/E ratio of 29.93. In other words, at today’s prices, investors are paying $29.93 for every $1 in prior year profit.

View our latest analysis for China Xiangtai Food

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for China Xiangtai Food:

P/E of 29.93 = $4.5 ÷ $0.15 (Based on the year to December 2018.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each $1 the company has earned over the last year. 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.

How Does China Xiangtai Food’s P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. As you can see below, China Xiangtai Food has a higher P/E than the average company (26.8) in the food industry.

NasdaqCM:PLIN Price Estimation Relative to Market, August 17th 2019
NasdaqCM:PLIN Price Estimation Relative to Market, August 17th 2019

Its relatively high P/E ratio indicates that China Xiangtai Food shareholders think it will perform better than 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 unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

China Xiangtai Food saw earnings per share decrease by 15% last year. But over the longer term (5 years) earnings per share have increased by 6.6%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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 China Xiangtai Food’s Debt Impact Its P/E Ratio?

China Xiangtai Food’s net debt is 11% of its market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.

The Verdict On China Xiangtai Food’s P/E Ratio

China Xiangtai Food has a P/E of 29.9. That’s higher than the average in its market, which is 17.2. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years.

Investors should be looking to buy stocks that the market is wrong about. 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, you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: China Xiangtai Food 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.