Yahoo Finance Despite Its High P/E Ratio, Is SJM Holdings Limited (HKG:880) Still Undervalued?
Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use SJM Holdings Limited's (HKG:880) P/E ratio to inform your assessment of the investment opportunity. SJM Holdings has a price to earnings ratio of 17.79, based on the last twelve months. That is equivalent to an earnings yield of about 5.6%.
See our latest analysis for SJM Holdings
How Do You Calculate SJM Holdings's P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for SJM Holdings:
P/E of 17.79 = HK$8.96 ÷ HK$0.50 (Based on the trailing twelve months to December 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. 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
P/E ratios primarily reflect market expectations around earnings growth rates. 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.
Notably, SJM Holdings grew EPS by a whopping 45% in the last year. And earnings per share have improved by 7.5% annually, over the last three years. I'd therefore be a little surprised if its P/E ratio was not relatively high. In contrast, EPS has decreased by 32%, annually, over 5 years.
How Does SJM 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. As you can see below, SJM Holdings has a higher P/E than the average company (15.5) in the hospitality industry.
SJM Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.
Is Debt Impacting SJM Holdings's P/E?
The extra options and safety that comes with SJM Holdings's HK$3.0b net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On SJM Holdings's P/E Ratio
SJM Holdings has a P/E of 17.8. That's higher than the average in the HK market, which is 11.6. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: SJM 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.
