What Does Vtech Holdings Limited’s (HKG:303) P/E Ratio Tell You?

Miguel Kauffman

Tue, Jan 29, 2019, 5:52 PM

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Vtech Holdings Limited’s (HKG:303) P/E ratio and reflect on what it tells us about the company’s share price. Vtech Holdings has a price to earnings ratio of 12.38, based on the last twelve months. That corresponds to an earnings yield of approximately 8.1%.

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How Do I Calculate Vtech Holdings’s 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 Vtech Holdings:

P/E of 12.38 = $9.5 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.77 (Based on the year to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Vtech Holdings shrunk earnings per share by 8.7% last year. But it has grown its earnings per share by 4.8% per year over the last three years. And it has shrunk its earnings per share by 1.3% per year over the last five years. So we might expect a relatively low P/E.

How Does Vtech Holdings’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (9.7) for companies in the communications industry is lower than Vtech Holdings’s P/E.

Vtech Holdings’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

Remember: P/E Ratios Don’t Consider The Balance Sheet

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 taking on debt (or spending its remaining cash).

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 Vtech Holdings’s Debt Impact Its P/E Ratio?

Vtech Holdings has net cash of US$74m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On Vtech Holdings’s P/E Ratio

Vtech Holdings has a P/E of 12.4. That’s higher than the average in the HK market, which is 10.4. Falling earnings per share is probably keeping traditional value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.

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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than Vtech 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).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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