Here's What Xinyi Automobile Glass Hong Kong Enterprises Limited's (HKG:8328) P/E Is Telling Us

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll look at Xinyi Automobile Glass Hong Kong Enterprises Limited's (HKG:8328) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Xinyi Automobile Glass Hong Kong Enterprises has a P/E ratio of 23.22. In other words, at today's prices, investors are paying HK$23.22 for every HK$1 in prior year profit.

View our latest analysis for Xinyi Automobile Glass Hong Kong Enterprises

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Xinyi Automobile Glass Hong Kong Enterprises:

P/E of 23.22 = HKD1.32 ÷ HKD0.06 (Based on the year to September 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each HKD1 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 Automobile Glass Hong Kong Enterprises 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. As you can see below, Xinyi Automobile Glass Hong Kong Enterprises has a higher P/E than the average company (9.0) in the electrical industry.

Its relatively high P/E ratio indicates that Xinyi Automobile Glass Hong Kong Enterprises shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. 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

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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Xinyi Automobile Glass Hong Kong Enterprises's earnings per share fell by 23% in the last twelve months.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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 Xinyi Automobile Glass Hong Kong Enterprises's Debt Impact Its P/E Ratio?

Xinyi Automobile Glass Hong Kong Enterprises has net cash of HK$221m. This is fairly high at 26% 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 Xinyi Automobile Glass Hong Kong Enterprises's P/E Ratio

Xinyi Automobile Glass Hong Kong Enterprises's P/E is 23.2 which is above average (10.6) in its market. Falling earnings per share is probably keeping traditional value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will!

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 shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Xinyi Automobile Glass Hong Kong Enterprises 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).

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.