Read This Before You Buy Greentech Technology International Limited (HKG:195) Because Of Its P/E Ratio

Simply Wall St

Fri, Sep 27, 2019, 8:03 PM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Greentech Technology International Limited's (HKG:195) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Greentech Technology International's P/E ratio is 7.97. That means that at current prices, buyers pay HK$7.97 for every HK$1 in trailing yearly profits.

Check out our latest analysis for Greentech Technology International

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Greentech Technology International:

P/E of 7.97 = HK$0.05 ÷ HK$0.01 (Based on the trailing twelve months to June 2019.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Does Greentech Technology International 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 Greentech Technology International has a lower P/E than the average (10.9) P/E for companies in the metals and mining industry.

SEHK:195 Price Estimation Relative to Market, September 28th 2019

Its relatively low P/E ratio indicates that Greentech Technology International shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Greentech Technology International, 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

Earnings growth rates have a big influence on P/E ratios. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Greentech Technology International saw earnings per share decrease by 15% last year.

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

The 'Price' in P/E reflects the market capitalization of the company. 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).

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.

Greentech Technology International's Balance Sheet

With net cash of HK$105m, Greentech Technology International has a very strong balance sheet, which may be important for its business. Having said that, at 29% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Greentech Technology International's P/E Ratio

Greentech Technology International trades on a P/E ratio of 8.0, which is below the HK market average of 10.4. 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 it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

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.

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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