Do you know what the P/E ratio of Tradelink Electronic Commerce Limited (HKG:536) means?

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This article is for investors who would like to better understand price-to-earnings ratios (P/E ratios). We will take a look at the P/E ratio of Tradelink Electronic Commerce Limited (HKG:536) and consider what it tells us about the company’s share price. Based on the last twelve months, Tradelink Electronic Commerce’s P/E ratio is 10.8In other words, at today’s prices, investors are paying HK$10.8 for every HK$1 of profit from the previous year.

See our latest analysis for Tradelink Electronic Commerce

How to calculate the price to earnings ratio?

This P/E formula Is:

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

Or for Tradelink Electronic Commerce:

P/E ratio 10.8 = HK$1.22 ÷ HK$0.11 (based on the year to December 2018)

Is a high P/E ratio good?

A higher P/E ratio means that investors are paying higher price for the company’s purchasing power. This isn’t necessarily good or bad, but a high P/E indicates relatively high expectations for what the company can achieve in the future.

How Growth Rates Affect P/E Ratios

Probably the most important factor in determining what P/E a company trades at is earnings growth. Earnings growth means that the “E” will be higher in the future. This means that if the stock price does not rise, the P/E will fall within a few years. And when that P/E falls, the company will look cheap unless the stock price rises.

It’s great to see that Tradelink Electronic Commerce has grown its EPS by 21% over the past year. And it’s grown its earnings per share by 1.5% per year over the past five years. That could justify the relatively high P/E ratio.

How does Tradelink Electronic Commerce’s P/E compare to its competitors?

The P/E ratio indicates whether the market has higher or lower expectations for a company. The image below shows that the average P/E (11.7) for companies in the IT industry is higher than Tradelink Electronic Commerce’s P/E ratio.

Its relatively low P/E ratio indicates that Tradelink Electronic Commerce shareholders believe it will struggle to perform as well as other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you think the stock is interesting, further research is recommended. For example, I often monitor Purchase and Sales Director.

Remember: P/E ratios do not include the balance sheet

The “price” in P/E reflects the company’s market capitalization. In other words, it doesn’t take into account any debt or cash the company might have on its balance sheet. In theory, a company could improve its earnings (and achieve a lower P/E in the future) by investing in growth. That means taking on debt (or spending cash).

Such spending may prove to be beneficial or detrimental in the long run, but the bottom line is that this ratio does not reflect the balance sheet.

So what does the Tradelink Electronic Commerce balance sheet tell us?

Tradelink Electronic Commerce has net cash of HK$129m. That’s quite a lot, at 13% of its market cap. That could mean that balance sheet strength is important to the company, but it should also help push the P/E a bit higher than it would otherwise be.

Tradelink Electronic Commerce P/E Verdict

Tradelink Electronic Commerce is trading at a P/E ratio of 10.8, which is fairly close to the Hong Kong market average of 10.7. Given the company’s recent growth and lack of debt, it seems the market is not very enthusiastic about the future.

Investors have an opportunity when the market’s 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’s a weighing machine.” While we don’t have analyst forecasts, shareholders may want to examine this detailed historical chart of earnings, revenue, and cash flow.

You can find a better buy than Tradelink Electronic Commerce. If you want to pick possible winners, check this out free a list of interesting companies with a P/E ratio below 20 (but which have proven they can grow profits).

Our goal is to provide you with long-term, focused research analysis based on fundamental data. Please note that our analysis may not include the latest price-sensitive company announcements or qualitative material.

If you see an error that needs to be corrected, please contact the editor at [email protected]. This article by Simply Wall St is for general information purposes only. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Simply Wall St has no position in the stocks mentioned. Thanks for reading.