Does Huscoke Holdings Limited's (HKG:704) P/E Ratio Signal A Buying Opportunity?

Simply Wall St

Tue, May 14, 2019, 6:01 PM

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 Huscoke Holdings Limited's (HKG:704) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, Huscoke Holdings has a P/E ratio of 4.67. In other words, at today's prices, investors are paying HK$4.67 for every HK$1 in prior year profit.

See our latest analysis for Huscoke Holdings

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Huscoke Holdings:

P/E of 4.67 = HK$0.23 ÷ HK$0.049 (Based on the trailing twelve months to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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

P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Huscoke Holdings's earnings per share grew by -8.4% in the last twelve months.

Does Huscoke Holdings Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. The image below shows that Huscoke Holdings has a lower P/E than the average (10.4) P/E for companies in the oil and gas industry.

SEHK:704 Price Estimation Relative to Market, May 15th 2019

This suggests that market participants think Huscoke Holdings 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.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).