June 18, 2024

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Despite Its High P/E Ratio, Is O-Net Technologies (Group) Limited (HKG:877) Still Undervalued?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll apply a basic P/E ratio analysis to O-Net Technologies (Group) Limited’s (HKG:877), to help you decide if the stock is worth further research. O-Net Technologies (Group) has a P/E ratio of 13.38, based on the last twelve months. That is equivalent to an earnings yield of about 7.5%.

View our latest analysis for O-Net Technologies (Group)

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for O-Net Technologies (Group):

P/E of 13.38 = HKD4.16 ÷ HKD0.31 (Based on the trailing twelve months to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price’.

How Does O-Net Technologies (Group)’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 (13.4) for companies in the communications industry is roughly the same as O-Net Technologies (Group)’s P/E.

SEHK:877 Price Estimation Relative to Market, February 24th 2020

O-Net Technologies (Group)’s P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. I would further inform my view by checking insider buying and selling., among other things.

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. When earnings grow, the ‘E’ increases, over time. 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.

O-Net Technologies (Group) shrunk earnings per share by 2.7% last year. But EPS is up 39% over the last 5 years.

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

The ‘Price’ in P/E reflects the market capitalization of the company. So it won’t reflect the advantage of cash, or disadvantage of debt. 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.

O-Net Technologies (Group)’s Balance Sheet

Net debt totals just 0.3% of O-Net Technologies (Group)’s market cap. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Verdict On O-Net Technologies (Group)’s P/E Ratio

O-Net Technologies (Group) has a P/E of 13.4. That’s higher than the average in its market, which is 10.1. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: O-Net Technologies (Group) 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 [email protected]. 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.

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