Yahoo Finance Do You Know What Geely Automobile Holdings Limited's (HKG:175) P/E Ratio Means?
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Geely Automobile Holdings Limited's (HKG:175) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Geely Automobile Holdings has a P/E ratio of 8.62. That is equivalent to an earnings yield of about 12%.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Check out our latest analysis for Geely Automobile Holdings
How Do I Calculate Geely Automobile 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 Geely Automobile Holdings:
P/E of 8.62 = CN¥12.05 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥1.4 (Based on the year to December 2018.)
Is A High P/E 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. 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
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
It's great to see that Geely Automobile Holdings grew EPS by 17% in the last year. And earnings per share have improved by 35% annually, over the last five years. With that performance, you might expect an above average P/E ratio.
Does Geely Automobile Holdings Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (9.4) for companies in the auto industry is higher than Geely Automobile Holdings's P/E.
Geely Automobile Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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 investing in growth. That means taking on debt (or spending its cash).
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.
Geely Automobile Holdings's Balance Sheet
With net cash of CN¥12b, Geely Automobile Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 11% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Geely Automobile Holdings's P/E Ratio
Geely Automobile Holdings trades on a P/E ratio of 8.6, which is below the HK market average of 11.3. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. One might conclude that the market is a bit pessimistic, given the low P/E ratio.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Geely Automobile Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.
