How Does Vision International Holdings's (HKG:8107) P/E Compare To Its Industry, After Its Big Share Price Gain?

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Simply Wall St

Thu, Dec 19, 2019, 5:07 PM

Vision International Holdings (HKG:8107) shareholders are no doubt pleased to see that the share price has had a great month, posting a 31% gain, recovering from prior weakness. While recent buyers might be laughing, long term holders might not be so pleased, since the recent gain only brings the full year return to evens.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Vision International Holdings

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

Vision International Holdings's P/E of 7.32 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (8.8) for companies in the luxury industry is higher than Vision International Holdings's P/E.

SEHK:8107 Price Estimation Relative to Market, December 20th 2019

Its relatively low P/E ratio indicates that Vision International Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Vision International Holdings, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Vision International Holdings saw earnings per share decrease by 3.3% last year. And it has shrunk its earnings per share by 30% per year over the last five years. So you wouldn't expect a very high P/E.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. 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).

Is Debt Impacting Vision International Holdings's P/E?

With net cash of HK$11m, Vision International Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 12% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Vision International Holdings's P/E Ratio

Vision International Holdings's P/E is 7.3 which is below average (10.5) in the HK market. Falling earnings per share are likely to be keeping potential buyers away, 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. What we know for sure is that investors are becoming less uncomfortable about Vision International Holdings's prospects, since they have pushed its P/E ratio from 5.6 to 7.3 over the last month. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.

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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Vision International 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 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.

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.

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