Do You Know What China Resources Medical Holdings Company Limited's (HKG:1515) P/E Ratio Means?

Simply Wall St

Tue, Jun 11, 2019, 6:30 PM

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. To keep it practical, we'll show how China Resources Medical Holdings Company Limited's (HKG:1515) P/E ratio could help you assess the value on offer. What is China Resources Medical Holdings's P/E ratio? Well, based on the last twelve months it is 13.75. That corresponds to an earnings yield of approximately 7.3%.

See our latest analysis for China Resources Medical Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for China Resources Medical Holdings:

P/E of 13.75 = CN¥4.67 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.34 (Based on the year to December 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

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 Resources Medical Holdings increased earnings per share by 3.2% last year. And its annual EPS growth rate over 5 years is 17%.

Does China Resources Medical Holdings Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that China Resources Medical Holdings has a lower P/E than the average (16.4) P/E for companies in the healthcare industry.

SEHK:1515 Price Estimation Relative to Market, June 12th 2019

China Resources Medical Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.

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).

So What Does China Resources Medical Holdings's Balance Sheet Tell Us?

China Resources Medical Holdings has net cash of CN¥1.4b. This is fairly high at 23% 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 Bottom Line On China Resources Medical Holdings's P/E Ratio

China Resources Medical Holdings has a P/E of 13.7. That's higher than the average in the HK market, which is 10.9. Earnings improved over the last year. Also positive, the relatively strong balance sheet will allow for investment in growth -- and the P/E indicates shareholders that will happen!

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.

You might be able to find a better buy than China Resources Medical Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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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