Yahoo Finance Despite Its High P/E Ratio, Is United Strength Power Holdings Limited (HKG:2337) Still Undervalued?
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at United Strength Power Holdings Limited's (HKG:2337) P/E ratio and reflect on what it tells us about the company's share price. What is United Strength Power Holdings's P/E ratio? Well, based on the last twelve months it is 30.5. That is equivalent to an earnings yield of about 3.3%.
View our latest analysis for United Strength Power Holdings
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for United Strength Power Holdings:
P/E of 30.5 = CN¥5.89 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.19 (Based on the year to June 2019.)
Is A High P/E 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.'
Does United Strength Power Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. The image below shows that United Strength Power Holdings has a higher P/E than the average (12) P/E for companies in the specialty retail industry.
United Strength Power 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 further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
United Strength Power Holdings's 96% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. 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 expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
United Strength Power Holdings's Balance Sheet
The extra options and safety that comes with United Strength Power Holdings's CN¥90m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On United Strength Power Holdings's P/E Ratio
United Strength Power Holdings trades on a P/E ratio of 30.5, which is above its market average of 10.6. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect United Strength Power Holdings to have a 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. Although we don't have analyst forecasts, you might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than United Strength Power 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).
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.
