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# Why Jiyi Household International Holdings Limited’s (HKG:1495) High P/E Ratio Isn’t Necessarily A Bad Thing

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Jiyi Household International Holdings Limited’s (HKG:1495) P/E ratio to inform your assessment of the investment opportunity. Jiyi Household International Holdings has a price to earnings ratio of 33.79, based on the last twelve months. That means that at current prices, buyers pay HK\$33.79 for every HK\$1 in trailing yearly profits.

### How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for Jiyi Household International Holdings:

P/E of 33.79 = CN¥0.72 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.021 (Based on the year to June 2018.)

### Is A High Price-to-Earnings 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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

### 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. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

Jiyi Household International Holdings saw earnings per share decrease by 43% last year. And EPS is down 67% a year, over the last 5 years. This could justify a pessimistic P/E.

### How Does Jiyi Household 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. As you can see below, Jiyi Household International Holdings has a much higher P/E than the average company (10.5) in the trade distributors industry.

That means that the market expects Jiyi Household International Holdings will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

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 Jiyi Household International Holdings’s P/E?

Net debt totals 10% of Jiyi Household International Holdings’s market cap. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.

### The Verdict On Jiyi Household International Holdings’s P/E Ratio

Jiyi Household International Holdings’s P/E is 33.8 which is way above average (10.7) in the HK 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.

Investors have an opportunity when market expectations about a stock are wrong. 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, you might want to assess this data-rich visualization of earnings, revenue and cash flow.

You might be able to find a better buy than Jiyi Household International 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).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.