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What Is BOC Aviation's (HKG:2588) P/E Ratio After Its Share Price Tanked?

Unfortunately for some shareholders, the BOC Aviation (HKG:2588) share price has dived 31% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 26% in the last year.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock 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.

Check out our latest analysis for BOC Aviation

Does BOC Aviation Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 6.13 that sentiment around BOC Aviation isn't particularly high. If you look at the image below, you can see BOC Aviation has a lower P/E than the average (9.2) in the trade distributors industry classification.

SEHK:2588 Price Estimation Relative to Market April 1st 2020
SEHK:2588 Price Estimation Relative to Market April 1st 2020

This suggests that market participants think BOC Aviation will underperform other companies in its industry. Since the market seems unimpressed with BOC Aviation, 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.

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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

BOC Aviation increased earnings per share by an impressive 13% over the last twelve months. And earnings per share have improved by 14% annually, over the last five years. So one might expect an above average P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. 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 BOC Aviation's Debt Impact Its P/E Ratio?

Net debt totals a substantial 298% of BOC Aviation's market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Verdict On BOC Aviation's P/E Ratio

BOC Aviation has a P/E of 6.1. That's below the average in the HK market, which is 9.1. The company may have significant debt, but EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. What can be absolutely certain is that the market has become more pessimistic about BOC Aviation over the last month, with the P/E ratio falling from 8.9 back then to 6.1 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: BOC Aviation 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).

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.