What Does Quanzhou Huixin Micro-Credit Co., Ltd.’s (HKG:1577) P/E Ratio Tell You?
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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Quanzhou Huixin Micro-Credit Co., Ltd.’s (HKG:1577) P/E ratio and reflect on what it tells us about the company’s share price. Based on the last twelve months, Quanzhou Huixin Micro-Credit’s P/E ratio is 9.49. In other words, at today’s prices, investors are paying HK$9.49 for every HK$1 in prior year profit.
View our latest analysis for Quanzhou Huixin Micro-Credit
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Quanzhou Huixin Micro-Credit:
P/E of 9.49 = CN¥1.29 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.14 (Based on the trailing twelve months to June 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 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 Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. 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.
Quanzhou Huixin Micro-Credit maintained roughly steady earnings over the last twelve months.
How Does Quanzhou Huixin Micro-Credit’s P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (8.6) for companies in the consumer finance industry is lower than Quanzhou Huixin Micro-Credit’s P/E.
Its relatively high P/E ratio indicates that Quanzhou Huixin Micro-Credit shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn’t guaranteed. So further research is always essential. I often monitor director buying and selling.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Quanzhou Huixin Micro-Credit’s Balance Sheet
Net debt totals 18% of Quanzhou Huixin Micro-Credit’s market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Bottom Line On Quanzhou Huixin Micro-Credit’s P/E Ratio
Quanzhou Huixin Micro-Credit has a P/E of 9.5. That’s below the average in the HK market, which is 10.7. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.
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.’ 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 Quanzhou Huixin Micro-Credit. So you may wish to see this free collection of other companies that have grown earnings strongly.
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. On rare occasion, data errors may occur. Thank you for reading.
