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Is Xinyi Energy Holdings Limited's (HKG:3868) High P/E Ratio A Problem For Investors?

Simply Wall St
·4-min read

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Xinyi Energy Holdings Limited's (HKG:3868) P/E ratio and reflect on what it tells us about the company's share price. Xinyi Energy Holdings has a price to earnings ratio of 14.51, based on the last twelve months. That corresponds to an earnings yield of approximately 6.9%.

See our latest analysis for Xinyi Energy Holdings

How Do You Calculate Xinyi Energy Holdings's P/E Ratio?

The formula for price to earnings is:

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

Or for Xinyi Energy Holdings:

P/E of 14.51 = HK$2.180 ÷ HK$0.150 (Based on the year to December 2019.)

(Note: the above calculation results may not be precise due to rounding.)

Is A High Price-to-Earnings 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.

Does Xinyi Energy 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 Xinyi Energy Holdings has a higher P/E than the average (6.2) P/E for companies in the renewable energy industry.

SEHK:3868 Price Estimation Relative to Market May 27th 2020
SEHK:3868 Price Estimation Relative to Market May 27th 2020

That means that the market expects Xinyi Energy Holdings will outperform other companies in its industry. 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.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

Xinyi Energy Holdings saw earnings per share decrease by 3.8% last year.

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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Xinyi Energy Holdings's Balance Sheet Tell Us?

Xinyi Energy Holdings has net debt worth just 2.2% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Verdict On Xinyi Energy Holdings's P/E Ratio

Xinyi Energy Holdings's P/E is 14.5 which is above average (9.3) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.

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.

You might be able to find a better buy than Xinyi Energy 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).

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.