In This Article:
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 Wah Sun Handbags International Holdings Limited’s (HKG:2683) P/E ratio to inform your assessment of the investment opportunity. Wah Sun Handbags International Holdings has a price to earnings ratio of 5.37, based on the last twelve months. That is equivalent to an earnings yield of about 19%.
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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 5.37 = HK$0.56 ÷ HK$0.10 (Based on the year to September 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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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.
Wah Sun Handbags International Holdings saw earnings per share decrease by 36% last year.
How Does Wah Sun Handbags 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. If you look at the image below, you can see Wah Sun Handbags International Holdings has a lower P/E than the average (9.9) 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.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. 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).