What Is Nexteer Automotive Group's (HKG:1316) P/E Ratio After Its Share Price Rocketed?

Simply Wall St

Sat, Apr 18, 2020, 6:25 PM 5 min read

Nexteer Automotive Group (HKG:1316) shareholders are no doubt pleased to see that the share price has bounced 44% in the last month alone, although it is still down 34% over the last quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 65% share price decline throughout the year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

See our latest analysis for Nexteer Automotive Group

How Does Nexteer Automotive Group's P/E Ratio Compare To Its Peers?

Nexteer Automotive Group's P/E of 6.28 indicates relatively low sentiment towards the stock. The image below shows that Nexteer Automotive Group has a lower P/E than the average (10.1) P/E for companies in the auto components industry.

SEHK:1316 Price Estimation Relative to Market April 19th 2020

Nexteer Automotive Group'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.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Nexteer Automotive Group's earnings per share fell by 39% in the last twelve months. But EPS is up 7.5% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 7.7% annually. This could justify a low P/E.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Nexteer Automotive Group's Balance Sheet Tell Us?

Nexteer Automotive Group has net cash of US$294m. This is fairly high at 20% 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 Nexteer Automotive Group's P/E Ratio

Nexteer Automotive Group has a P/E of 6.3. That's below the average in the HK market, which is 9.6. 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. What is very clear is that the market has become less pessimistic about Nexteer Automotive Group over the last month, with the P/E ratio rising from 4.4 back then to 6.3 today. 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.

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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Nexteer Automotive Group 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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