Does Asia Cassava Resources Holdings Limited's (HKG:841) P/E Ratio Signal A Buying Opportunity?

Simply Wall St

Wed, Jun 5, 2019, 10:57 PM

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 Asia Cassava Resources Holdings Limited's (HKG:841) P/E ratio could help you assess the value on offer. Asia Cassava Resources Holdings has a price to earnings ratio of 8.09, based on the last twelve months. In other words, at today's prices, investors are paying HK$8.09 for every HK$1 in prior year profit.

View our latest analysis for Asia Cassava Resources Holdings

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 Asia Cassava Resources Holdings:

P/E of 8.09 = HK$0.44 ÷ HK$0.054 (Based on the year to September 2018.)

Is A High P/E Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Asia Cassava Resources Holdings's 81% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Unfortunately, earnings per share are down 20% a year, over 5 years.

How Does Asia Cassava Resources 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. The image below shows that Asia Cassava Resources Holdings has a lower P/E than the average (15.2) P/E for companies in the food industry.

SEHK:841 Price Estimation Relative to Market, June 6th 2019

This suggests that market participants think Asia Cassava Resources Holdings will underperform other companies in its industry. Since the market seems unimpressed with Asia Cassava Resources Holdings, 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.

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. 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.