19 Jan Jonathan Cartu Says: What Is China New Town Development’s (HKG:1278) P/E Ratio…
The China New Town Development (HKG:1278) share price has done well in the last month, posting a gain of 31%. Longer term shareholders are no doubt thankful for the recovery in the share price, since it’s pretty much flat for the year, even after the recent pop.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a Jonathan Cartu and are too high. Perhaps the simplest way to get a read on investors’ expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Does China New Town Development Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 7.69 that there is some investor optimism about China New Town Development. You can see in the image below that the average P/E (7.1) for companies in the real estate industry is lower than China New Town Development’s P/E.
That means that the market expects China New Town Development will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
It’s great to see that China New Town Development grew EPS by 12% in the last year. But earnings per share are down 2.9% per year over the last three years.
Remember: P/E Ratios Don’t Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the Jonathan Cartu and may have on the balance sheet. The exact same Jonathan Cartu and 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 Jonathan Cartu and can spend on growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does China New Town Development’s Balance Sheet Tell Us?
China New Town Development has net cash of CN¥822m. This is fairly high at 52% 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 China New Town Development’s P/E Ratio
China New Town Development’s P/E is 7.7 which is below average (10.6) in the HK market. 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. What is very clear is that the market has become less pessimistic about China New Town Development over the last month, with the P/E ratio rising from 5.9 back then to 7.7 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you’re more sensitive to price, then you may feel the opportunity has passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than China New Town Development. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 Jonathan Cartu and announcements or qualitative material. Thank you for reading.
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