Is Alpha Era International Holdings Limited's (HKG:8406) P/E Ratio Really That Good?

Simply Wall St

Tue, Jun 18, 2019, 7:33 PM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Alpha Era International Holdings Limited's (HKG:8406) P/E ratio to inform your assessment of the investment opportunity. Alpha Era International Holdings has a price to earnings ratio of 4.98, based on the last twelve months. That is equivalent to an earnings yield of about 20%.

View our latest analysis for Alpha Era International Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for Alpha Era International Holdings:

P/E of 4.98 = CN¥0.14 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.028 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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 Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Alpha Era International Holdings's earnings made like a rocket, taking off 127% last year. The sweetener is that the annual five year growth rate of 27% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.

How Does Alpha Era International Holdings'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. If you look at the image below, you can see Alpha Era International Holdings has a lower P/E than the average (11.9) in the leisure industry classification.

SEHK:8406 Price Estimation Relative to Market, June 19th 2019

Its relatively low P/E ratio indicates that Alpha Era International Holdings shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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

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. 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).

Alpha Era International Holdings's Balance Sheet

Alpha Era International Holdings has net cash of CN¥19m. This is fairly high at 17% 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 Verdict On Alpha Era International Holdings's P/E Ratio

Alpha Era International Holdings's P/E is 5 which is below average (10.7) in the HK market. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The below average P/E ratio suggests that market participants don't believe the strong growth will continue.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Alpha Era International Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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