Why Luks Group (Vietnam Holdings) Company Limited's (HKG:366) High P/E Ratio Isn't Necessarily A Bad Thing




  • In Business
  • 2019-05-16 06:33:01Z
  • By Simply Wall St.
 

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Luks Group (Vietnam Holdings) Company Limited's (HKG:366) P/E ratio to inform your assessment of the investment opportunity. Luks Group (Vietnam Holdings) has a P/E ratio of 6.45, based on the last twelve months. In other words, at today's prices, investors are paying HK$6.45 for every HK$1 in prior year profit.

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Check out our latest analysis for Luks Group (Vietnam Holdings)

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Luks Group (Vietnam Holdings):

P/E of 6.45 = HK$1.84 ÷ HK$0.29 (Based on the trailing twelve months to December 2018.)

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.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

In the last year, Luks Group (Vietnam Holdings) grew EPS like Taylor Swift grew her fan base back in 2010; the 53% gain was both fast and well deserved. And earnings per share have improved by 17% annually, over the last three years. So you might say it really deserves to have an above-average P/E ratio.

How Does Luks Group (Vietnam 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 (6.1) for companies in the basic materials industry is roughly the same as Luks Group (Vietnam Holdings)'s P/E.

Luks Group (Vietnam Holdings)'s P/E tells us that market participants think its prospects are roughly in line with its industry. So if Luks Group (Vietnam Holdings) actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. 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.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Luks Group (Vietnam Holdings)'s Balance Sheet

Luks Group (Vietnam Holdings) has net cash of HK$220m. This is fairly high at 24% 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 Luks Group (Vietnam Holdings)'s P/E Ratio

Luks Group (Vietnam Holdings) trades on a P/E ratio of 6.5, which is below the HK market average of 11.3. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The below average P/E ratio suggests that market participants don't believe the strong growth will continue.

Investors have an opportunity when market expectations about a stock are wrong. 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 shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Luks Group (Vietnam 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).

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.

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