Is Ten Pao Group Holdings Limited's (HKG:1979) P/E Ratio Really That Good?

Simply Wall St

Thu, Jan 30, 2020, 6:54 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 apply a basic P/E ratio analysis to Ten Pao Group Holdings Limited's (HKG:1979), to help you decide if the stock is worth further research. Ten Pao Group Holdings has a price to earnings ratio of 5.81, based on the last twelve months. That means that at current prices, buyers pay HK$5.81 for every HK$1 in trailing yearly profits.

See our latest analysis for Ten Pao Group Holdings

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 Ten Pao Group Holdings:

P/E of 5.81 = HKD0.86 ÷ HKD0.15 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HKD1 of company earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Does Ten Pao Group Holdings's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Ten Pao Group Holdings has a lower P/E than the average (8.8) P/E for companies in the electrical industry.

SEHK:1979 Price Estimation Relative to Market, January 31st 2020

Its relatively low P/E ratio indicates that Ten Pao Group Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Ten Pao Group 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Ten Pao Group Holdings's earnings made like a rocket, taking off 178% last year. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. 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.

So What Does Ten Pao Group Holdings's Balance Sheet Tell Us?

Ten Pao Group Holdings's net debt is 7.4% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Verdict On Ten Pao Group Holdings's P/E Ratio

Ten Pao Group Holdings's P/E is 5.8 which is below average (10.0) in the HK market. The company hasn't stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can take a closer look at the fundamentals, here.

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. 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.

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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