Is Lifestyle International Holdings Limited’s (HKG:1212) P/E Ratio Really That Good?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Lifestyle International Holdings Limited’s (HKG:1212) P/E ratio could help you assess the value on offer. What is Lifestyle International Holdings’s P/E ratio? Well, based on the last twelve months it is 6.47. That is equivalent to an earnings yield of about 15.5%.

How Do I Calculate Lifestyle International Holdings’s Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Lifestyle International Holdings:

P/E of 6.47 = HK$8.90 ÷ HK$1.38 (Based on the trailing twelve months to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each HK$1 the company has earned over the last year. 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 Lifestyle International Holdings’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Lifestyle International Holdings has a lower P/E than the average (10.4) in the multiline retail industry classification.

SEHK:1212 Price Estimation Relative to Market, January 13th 2020
SEHK:1212 Price Estimation Relative to Market, January 13th 2020

Its relatively low P/E ratio indicates that Lifestyle International Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

Lifestyle International Holdings saw earnings per share decrease by 11% last year. But EPS is up 29% over the last 3 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. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.

Is Debt Impacting Lifestyle International Holdings’s P/E?

Net debt totals 51% of Lifestyle International Holdings’s market cap. This is a reasonably significant level of debt — all else being equal you’d expect a much lower P/E than if it had net cash.

The Verdict On Lifestyle International Holdings’s P/E Ratio

Lifestyle International Holdings trades on a P/E ratio of 6.5, which is below the HK market average of 10.6. When you consider that the company has significant debt, and didn’t grow EPS last year, it isn’t surprising that the market has muted expectations.

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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.


Author: Roky