Is Technovator International Limited’s (HKG:1206) P/E Ratio Really That Good?

Matthew Smith

Sat, Feb 9, 2019, 7:50 PM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Technovator International Limited’s (HKG:1206) P/E ratio could help you assess the value on offer. Based on the last twelve months, Technovator International’s P/E ratio is 3.07. That means that at current prices, buyers pay HK$3.07 for every HK$1 in trailing yearly profits.

Check out our latest analysis for Technovator International

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Technovator International:

P/E of 3.07 = CN¥1.05 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.34 (Based on the year to June 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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. 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.

Most would be impressed by Technovator International earnings growth of 16% in the last year. And it has bolstered its earnings per share by 15% per year over the last five years. With that performance, you might expect an above average P/E ratio.

How Does Technovator International’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. The image below shows that Technovator International has a lower P/E than the average (8.4) P/E for companies in the electronic industry.

This suggests that market participants think Technovator International will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, 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. Thus, the metric does not reflect cash or debt held by the company. 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).

Technovator International’s Balance Sheet

Since Technovator International holds net cash of CN¥224m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Technovator International’s P/E Ratio

Technovator International’s P/E is 3.1 which is below average (10.5) in the HK market. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The relatively low P/E ratio implies the market is pessimistic.

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 might want to assess this data-rich visualization of earnings, revenue and cash flow.

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.

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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