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A Sliding Share Price Has Us Looking At China Xiangtai Food Co., Ltd.'s (NASDAQ:PLIN) P/E Ratio

To the annoyance of some shareholders, China Xiangtai Food (NASDAQ:PLIN) shares are down a considerable 31% in the last month. Zooming out, the recent drop wiped out a year's worth of gains, with the share price now back where it was a year ago.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for China Xiangtai Food

How Does China Xiangtai Food's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 11.97 that sentiment around China Xiangtai Food isn't particularly high. If you look at the image below, you can see China Xiangtai Food has a lower P/E than the average (20.9) in the food industry classification.

NasdaqCM:PLIN Price Estimation Relative to Market, February 28th 2020
NasdaqCM:PLIN Price Estimation Relative to Market, February 28th 2020

China Xiangtai Food's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Most would be impressed by China Xiangtai Food earnings growth of 14% in the last year. And it has bolstered its earnings per share by 14% per year over the last five years. So one might expect an above average P/E ratio.

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

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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting China Xiangtai Food's P/E?

China Xiangtai Food has net debt worth 15% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Verdict On China Xiangtai Food's P/E Ratio

China Xiangtai Food's P/E is 12.0 which is below average (16.9) in the US market. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What can be absolutely certain is that the market has become significantly less optimistic about China Xiangtai Food over the last month, with the P/E ratio falling from 17.2 back then to 12.0 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.