What Does Boyuan Holdings Limited’s (ASX:BHL) P/E Ratio Tell You?

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 Boyuan Holdings Limited’s (ASX:BHL) P/E ratio to inform your assessment of the investment opportunity. Boyuan Holdings has a price to earnings ratio of 24.01, based on the last twelve months. In other words, at today’s prices, investors are paying A$24.01 for every A$1 in prior year profit.

Check out our latest analysis for Boyuan Holdings

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Boyuan Holdings:

P/E of 24.01 = A$0.120 ÷ A$0.005 (Based on the year to December 2019.)

(Note: the above calculation results may not be precise due to rounding.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each A$1 the company has earned over the last year. 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 Boyuan 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. As you can see below, Boyuan Holdings has a higher P/E than the average company (14.2) in the real estate industry.

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That means that the market expects Boyuan Holdings will outperform other companies in its industry. 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

P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. 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.

Boyuan Holdings saw earnings per share decrease by 46% last year.

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

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. 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).

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.

Is Debt Impacting Boyuan Holdings’s P/E?

Boyuan Holdings has net debt worth 85% of its market capitalization. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On Boyuan Holdings’s P/E Ratio

Boyuan Holdings trades on a P/E ratio of 24.0, which is above its market average of 14.9. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future.

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. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

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