In This Article:
The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll look at Asia Cassava Resources Holdings Limited’s (HKG:841) P/E ratio and reflect on what it tells us about the company’s share price. Asia Cassava Resources Holdings has a P/E ratio of 8.11, based on the last twelve months. That corresponds to an earnings yield of approximately 12%.
See 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 8.11 = HK$0.46 ÷ HK$0.057 (Based on the trailing twelve months to March 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. 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. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Asia Cassava Resources Holdings increased earnings per share by a whopping 94% last year. But earnings per share are down 31% per year over the last five years.
How Does Asia Cassava Resources Holdings’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Asia Cassava Resources Holdings has a lower P/E than the average (10.8) in the food industry classification.
Its relatively low P/E ratio indicates that Asia Cassava Resources Holdings shareholders think it will struggle to do as well as other companies in its industry classification. 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.