Why Bosideng International Holdings Limited's (HKG:3998) High P/E Ratio Isn't Necessarily A Bad Thing

Simply Wall St

Sun, Jun 9, 2019, 6:56 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 Bosideng International Holdings Limited's (HKG:3998) P/E ratio could help you assess the value on offer. Looking at earnings over the last twelve months, Bosideng International Holdings has a P/E ratio of 25.57. In other words, at today's prices, investors are paying HK$25.57 for every HK$1 in prior year profit.

Check out our latest analysis for Bosideng International Holdings

How Do I Calculate Bosideng International Holdings's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Bosideng International Holdings:

P/E of 25.57 = CN¥1.67 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.065 (Based on the year to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Bosideng International Holdings's 67% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Even better, EPS is up 271% per year over three years. So you might say it really deserves to have an above-average P/E ratio. Unfortunately, earnings per share are down 14% a year, over 5 years.

How Does Bosideng International Holdings's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, Bosideng International Holdings has a higher P/E than the average company (9.1) in the luxury industry.

SEHK:3998 Price Estimation Relative to Market, June 10th 2019

That means that the market expects Bosideng International Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

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

With net cash of CN¥2.0b, Bosideng International Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 11% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

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

Bosideng International Holdings's P/E is 25.6 which is above average (10.9) in the HK market. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings).

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.' So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Bosideng International 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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