Does Prinx Chengshan (Cayman) Holding Limited's (HKG:1809) P/E Ratio Signal A Buying Opportunity?

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Simply Wall St

Mon, May 18, 2020, 7:26 PM 4 min read

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 Prinx Chengshan (Cayman) Holding Limited's (HKG:1809) P/E ratio to inform your assessment of the investment opportunity. Prinx Chengshan (Cayman) Holding has a P/E ratio of 8.55, based on the last twelve months. That means that at current prices, buyers pay HK$8.55 for every HK$1 in trailing yearly profits.

View our latest analysis for Prinx Chengshan (Cayman) Holding

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Prinx Chengshan (Cayman) Holding:

P/E of 8.55 = CN¥6.459 ÷ CN¥0.755 (Based on the trailing twelve months to December 2019.)

(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)

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.

Does Prinx Chengshan (Cayman) Holding 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 Prinx Chengshan (Cayman) Holding has a lower P/E than the average (10.6) P/E for companies in the auto components industry.

SEHK:1809 Price Estimation Relative to Market May 19th 2020

Its relatively low P/E ratio indicates that Prinx Chengshan (Cayman) Holding shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Prinx Chengshan (Cayman) Holding, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Prinx Chengshan (Cayman) Holding saw earnings per share decrease by 16% last year. But over the longer term (5 years) earnings per share have increased by 3.4%.

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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.

So What Does Prinx Chengshan (Cayman) Holding's Balance Sheet Tell Us?

With net cash of CN¥738m, Prinx Chengshan (Cayman) Holding has a very strong balance sheet, which may be important for its business. Having said that, at 18% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Prinx Chengshan (Cayman) Holding's P/E Ratio

Prinx Chengshan (Cayman) Holding has a P/E of 8.5. That's below the average in the HK market, which is 9.7. The recent drop in earnings per share would almost certainly temper expectations, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there's real potential that the low P/E could eventually indicate undervaluation.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.