Should You Be Tempted To Sell World-Link Logistics (Asia) Holding Limited (HKG:6083) Because Of Its P/E Ratio?

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Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll show how you can use World-Link Logistics (Asia) Holding Limited’s (HKG:6083) P/E ratio to inform your assessment of the investment opportunity. Looking at earnings over the last twelve months, World-Link Logistics (Asia) Holding has a P/E ratio of 20.00. In other words, at today’s prices, investors are paying HK$20.00 for every HK$1 in prior year profit.

See our latest analysis for World-Link Logistics (Asia) Holding

How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for World-Link Logistics (Asia) Holding:

P/E of 20.00 = HK$0.51 ÷ HK$0.03 (Based on the trailing twelve months to June 2019.)

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 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 World-Link Logistics (Asia) Holding’s P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, World-Link Logistics (Asia) Holding has a higher P/E than the average company (9.3) in the logistics industry.

SEHK:6083 Price Estimation Relative to Market, October 9th 2019

That means that the market expects World-Link Logistics (Asia) Holding will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. 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

P/E ratios primarily reflect market expectations around earnings growth rates. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

World-Link Logistics (Asia) Holding saw earnings per share decrease by 39% last year. But over the longer term (3 years), earnings per share have increased by 16%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does World-Link Logistics (Asia) Holding’s Debt Impact Its P/E Ratio?

World-Link Logistics (Asia) Holding has net cash of HK$46m. This is fairly high at 19% 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 World-Link Logistics (Asia) Holding’s P/E Ratio

World-Link Logistics (Asia) Holding trades on a P/E ratio of 20.0, which is above its market average of 10.3. The recent drop in earnings per share might keep value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls.

Investors should be looking to buy stocks that the market is wrong about. 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. Although we don’t have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than World-Link Logistics (Asia) Holding. So you may wish to see this free collection of other companies that have grown earnings strongly.

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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