Yahoo Finanza Here's How P/E Ratios Can Help Us Understand Alpha Era International Holdings Limited (HKG:8406)
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Alpha Era International Holdings Limited's (HKG:8406) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, Alpha Era International Holdings's P/E ratio is 4.24. That corresponds to an earnings yield of approximately 23.6%.
Check out our latest analysis for Alpha Era International Holdings
How Do I Calculate A 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 Alpha Era International Holdings:
P/E of 4.24 = CN¥0.106 ÷ CN¥0.025 (Based on the trailing twelve months to March 2020.)
(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Alpha Era International Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. We can see in the image below that the average P/E (4.7) for companies in the leisure industry is higher than Alpha Era International Holdings's P/E.
Alpha Era International Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
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. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Alpha Era International Holdings shrunk earnings per share by 10% over the last year. But EPS is up 24% over the last 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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 Alpha Era International Holdings's Balance Sheet Tell Us?
Alpha Era International Holdings has net cash of CN¥44m. This is fairly high at 53% 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 Alpha Era International Holdings's P/E Ratio
Alpha Era International Holdings trades on a P/E ratio of 4.2, which is below the HK market average of 9.3. The recent drop in earnings per share would almost certainly temper expectations, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.
Investors should be looking to buy stocks that the market is wrong about. 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 you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Alpha Era International Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
