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 Wah Sun Handbags International Holdings Limited’s (HKG:2683) P/E ratio could help you assess the value on offer. Wah Sun Handbags International Holdings has a price to earnings ratio of 4.77, based on the last twelve months. That means that at current prices, buyers pay HK$4.77 for every HK$1 in trailing yearly profits.
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Wah Sun Handbags International Holdings:
P/E of 4.77 = HK$0.68 ÷ HK$0.14 (Based on the year to March 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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
P/E ratios primarily reflect market expectations around earnings growth rates. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Wah Sun Handbags International Holdings saw earnings per share decrease by 22% last year.
How Does Wah Sun Handbags International Holdings’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Wah Sun Handbags International Holdings has a lower P/E than the average (10.3) in the luxury industry classification.
Wah Sun Handbags International Holdings’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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Is Debt Impacting Wah Sun Handbags International Holdings’s P/E?
Since Wah Sun Handbags International Holdings holds net cash of HK$89m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Wah Sun Handbags International Holdings’s P/E Ratio
Wah Sun Handbags International Holdings has a P/E of 4.8. That’s below the average in the HK market, which is 10.7. Falling earnings per share are likely to be keeping potential buyers away, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity.
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. 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 Wah Sun Handbags 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 firstname.lastname@example.org.