Is China Distance Education Holdings Limited’s (NYSE:DL) P/E Ratio Really That Good?

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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 China Distance Education Holdings Limited’s (NYSE:DL) P/E ratio to inform your assessment of the investment opportunity. What is China Distance Education Holdings’s P/E ratio? Well, based on the last twelve months it is 13.88. In other words, at today’s prices, investors are paying $13.88 for every $1 in prior year profit.

See our latest analysis for China Distance Education Holdings

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for China Distance Education Holdings:

P/E of 13.88 = $5.35 ÷ $0.39 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn’t a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business’s prospects, relative to stocks with a lower P/E.

How Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

China Distance Education Holdings’s 128% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Unfortunately, earnings per share are down 4.0% a year, over 5 years.

How Does China Distance Education 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. The image below shows that China Distance Education Holdings has a lower P/E than the average (25.6) P/E for companies in the consumer services industry.

NYSE:DL Price Estimation Relative to Market, June 20th 2019
NYSE:DL Price Estimation Relative to Market, June 20th 2019

This suggests that market participants think China Distance Education Holdings will underperform other companies in its industry. Since the market seems unimpressed with China Distance Education Holdings, it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

Remember: P/E Ratios Don’t Consider The Balance Sheet

Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

How Does China Distance Education Holdings’s Debt Impact Its P/E Ratio?

With net cash of US$24m, China Distance Education Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 13% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On China Distance Education Holdings’s P/E Ratio

China Distance Education Holdings has a P/E of 13.9. That’s below the average in the US market, which is 17.9. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic. Because analysts are predicting more growth in the future, one might have expected to see a higher P/E ratio. You can taker closer look at the fundamentals, here.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this freevisual report on analyst forecasts could hold the key to an excellent investment decision.

But note: China Distance Education Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.