Does China Harmony New Energy Auto Holding Limited's (HKG:3836) P/E Ratio Signal A Buying Opportunity?

Simply Wall St

Wed, Jul 10, 2019, 12:03 AM

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll apply a basic P/E ratio analysis to China Harmony New Energy Auto Holding Limited's (HKG:3836), to help you decide if the stock is worth further research. What is China Harmony New Energy Auto Holding's P/E ratio? Well, based on the last twelve months it is 5.44. In other words, at today's prices, investors are paying HK$5.44 for every HK$1 in prior year profit.

Check out our latest analysis for China Harmony New Energy Auto Holding

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for China Harmony New Energy Auto Holding:

P/E of 5.44 = CN¥2.44 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.45 (Based on the year to December 2018.)

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. 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 China Harmony New Energy Auto Holding's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that China Harmony New Energy Auto Holding has a lower P/E than the average (11.5) P/E for companies in the specialty retail industry.

SEHK:3836 Price Estimation Relative to Market, July 10th 2019

Its relatively low P/E ratio indicates that China Harmony New Energy Auto Holding shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with China Harmony New Energy Auto Holding, 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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.

China Harmony New Energy Auto Holding's earnings per share fell by 32% in the last twelve months. But it has grown its earnings per share by 1.1% per year over the last five years.

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

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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does China Harmony New Energy Auto Holding's Debt Impact Its P/E Ratio?

China Harmony New Energy Auto Holding has net debt worth 21% of its market capitalization. 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 China Harmony New Energy Auto Holding's P/E Ratio

China Harmony New Energy Auto Holding trades on a P/E ratio of 5.4, which is below the HK market average of 10.8. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.

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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