It's really great to see that even after a strong run, DaChan Food (Asia) (HKG:3999) shares have been powering on, with a gain of 31% in the last thirty days. And the full year gain of 31% isn't too shabby, either!

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business 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 DaChan Food (Asia)

How Does DaChan Food (Asia)'s P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 10.13 that sentiment around DaChan Food (Asia) isn't particularly high. The image below shows that DaChan Food (Asia) has a lower P/E than the average (15.5) P/E for companies in the food industry.

Its relatively low P/E ratio indicates that DaChan Food (Asia) shareholders think it will struggle to do as well as other companies in its industry classification. 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

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

DaChan Food (Asia) shrunk earnings per share by 15% over the last year. But over the longer term (5 years) earnings per share have increased by 14%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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. 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).

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.