Yahoo Finance Here's How P/E Ratios Can Help Us Understand Sisram Medical Ltd (HKG:1696)
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Sisram Medical Ltd's (HKG:1696) P/E ratio and reflect on what it tells us about the company's share price. Sisram Medical has a P/E ratio of 10.09, based on the last twelve months. That means that at current prices, buyers pay HK$10.09 for every HK$1 in trailing yearly profits.
View our latest analysis for Sisram Medical
How Do I Calculate A 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 Sisram Medical:
P/E of 10.09 = HK$0.54 (Note: this is the share price in the reporting currency, namely, USD ) ÷ HK$0.05 (Based on the year to June 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 Does Sisram Medical's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Sisram Medical has a lower P/E than the average (16.5) P/E for companies in the medical equipment industry.
Its relatively low P/E ratio indicates that Sisram Medical shareholders think it will struggle to do as well as other companies in its industry classification. 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.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Sisram Medical increased earnings per share by a whopping 46% last year.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. 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 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.
How Does Sisram Medical's Debt Impact Its P/E Ratio?
Sisram Medical has net cash of US$100m. This is fairly high at 42% 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 Verdict On Sisram Medical's P/E Ratio
Sisram Medical's P/E is 10.1 which is about average (10.2) in the HK market. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Sisram Medical to have a higher 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. 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 Sisram Medical. 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).
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.
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. Thank you for reading.
