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Despite Its High P/E Ratio, Is AGTech Holdings Limited (HKG:8279) Still Undervalued?

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This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to AGTech Holdings Limited's (HKG:8279), to help you decide if the stock is worth further research. Looking at earnings over the last twelve months, AGTech Holdings has a P/E ratio of 76.49. In other words, at today's prices, investors are paying HK$76.49 for every HK$1 in prior year profit.

View our latest analysis for AGTech Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for AGTech Holdings:

P/E of 76.49 = HK$0.48 ÷ HK$0.0063 (Based on the year to March 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

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. 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.

AGTech Holdings's 86% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.

Does AGTech Holdings Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that AGTech Holdings has a significantly higher P/E than the average (11.8) P/E for companies in the it industry.

SEHK:8279 Price Estimation Relative to Market, June 21st 2019
SEHK:8279 Price Estimation Relative to Market, June 21st 2019

Its relatively high P/E ratio indicates that AGTech Holdings shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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 AGTech Holdings's Debt Impact Its P/E Ratio?

AGTech Holdings has net cash of HK$2.0b. This is fairly high at 36% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On AGTech Holdings's P/E Ratio

With a P/E ratio of 76.5, AGTech Holdings is expected to grow earnings very strongly in the years to come. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect AGTech Holdings to have a high P/E ratio.

Investors should be looking to buy stocks that the market is wrong about. 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.' We don't have analyst forecasts, but 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.

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.