A Sliding Share Price Has Us Looking At Public Packages Holdings Berhad's (KLSE:PPHB) P/E Ratio

Of late the Public Packages Holdings Berhad (KLSE:PPHB) share price has softened like an ice cream in the sun, melting a full 33%. But there's still good reason for shareholders to be content; the stock has gained 6.1% in the last 90 days. Looking at the bigger picture, the stock is up 54% in the last year.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for Public Packages Holdings Berhad

Does Public Packages Holdings Berhad Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 6.90 that sentiment around Public Packages Holdings Berhad isn't particularly high. We can see in the image below that the average P/E (11.3) for companies in the packaging industry is higher than Public Packages Holdings Berhad's P/E.

Public Packages Holdings Berhad's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Public Packages Holdings Berhad increased earnings per share by an impressive 24% over the last twelve months. And its annual EPS growth rate over 5 years is 14%. With that performance, you might expect an above average P/E ratio.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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 Public Packages Holdings Berhad's P/E?

The extra options and safety that comes with Public Packages Holdings Berhad's RM15m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On Public Packages Holdings Berhad's P/E Ratio

Public Packages Holdings Berhad's P/E is 6.9 which is below average (14.4) in the MY market. 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. Given Public Packages Holdings Berhad's P/E ratio has declined from 10.4 to 6.9 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Public Packages Holdings Berhad. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.