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Should We Worry About Victory Securities (Holdings) Company Limited's (HKG:8540) P/E Ratio?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Victory Securities (Holdings) Company Limited's (HKG:8540), to help you decide if the stock is worth further research. What is Victory Securities (Holdings)'s P/E ratio? Well, based on the last twelve months it is 29.78. In other words, at today's prices, investors are paying HK$29.78 for every HK$1 in prior year profit.

View our latest analysis for Victory Securities (Holdings)

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 Victory Securities (Holdings):

P/E of 29.78 = HKD1.25 ÷ HKD0.04 (Based on the trailing twelve months to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HKD1 of company earnings. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

Does Victory Securities (Holdings) Have A Relatively High Or Low P/E For Its Industry?

We can get an indication of market expectations by looking at the P/E ratio. The image below shows that Victory Securities (Holdings) has a higher P/E than the average (14.0) P/E for companies in the capital markets industry.

SEHK:8540 Price Estimation Relative to Market, January 22nd 2020
SEHK:8540 Price Estimation Relative to Market, January 22nd 2020

Victory Securities (Holdings)'s P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

Victory Securities (Holdings) shrunk earnings per share by 54% over the last year. But it has grown its earnings per share by 18% per year over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

How Does Victory Securities (Holdings)'s Debt Impact Its P/E Ratio?

Victory Securities (Holdings)'s net debt equates to 26% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Victory Securities (Holdings)'s P/E Ratio

Victory Securities (Holdings)'s P/E is 29.8 which is above average (10.4) in its market. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.

You might be able to find a better buy than Victory Securities (Holdings). If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.

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.