The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Vitasoy International Holdings Limited's (HKG:345) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Vitasoy International Holdings's P/E ratio is 41.73. That means that at current prices, buyers pay HK$41.73 for every HK$1 in trailing yearly profits.
See our latest analysis for Vitasoy International Holdings
How Do I Calculate Vitasoy International Holdings's Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Vitasoy International Holdings:
P/E of 41.73 = HKD27.95 ÷ HKD0.67 (Based on the trailing twelve months to September 2019.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each HKD1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Does Vitasoy International Holdings's P/E Ratio Compare To Its Peers?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (15.1) for companies in the food industry is lower than Vitasoy International Holdings's P/E.
Its relatively high P/E ratio indicates that Vitasoy International 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.
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
Vitasoy International Holdings maintained roughly steady earnings over the last twelve months. But it has grown its earnings per share by 15% per year over the last five years.
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. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.
How Does Vitasoy International Holdings's Debt Impact Its P/E Ratio?
Vitasoy International Holdings has net cash of HK$801m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Vitasoy International Holdings's P/E Ratio
Vitasoy International Holdings's P/E is 41.7 which is way above average (9.6) in its market. Earnings improved over the last year. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Vitasoy International Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
2020-03-02 07:35:37Z
https://finance.yahoo.com/news/dont-sell-vitasoy-international-holdings-072428369.html
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