To the annoyance of some shareholders, Texhong Textile Group (HKG:2678) shares are down a considerable 31% in the last month. That drop has capped off a tough year for shareholders, with the share price down 52% in that time.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

View our latest analysis for Texhong Textile Group

How Does Texhong Textile Group's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 5.52 that sentiment around Texhong Textile Group isn't particularly high. If you look at the image below, you can see Texhong Textile Group has a lower P/E than the average (7.3) in the luxury industry classification.

This suggests that market participants think Texhong Textile Group will underperform other companies in its 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

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Texhong Textile Group saw earnings per share decrease by 24% last year. But it has grown its earnings per share by 23% per year over the last five years. And EPS is down 10% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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).