In This Article:
This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Best Pacific International Holdings Limited's (HKG:2111), to help you decide if the stock is worth further research. What is Best Pacific International Holdings's P/E ratio? Well, based on the last twelve months it is 9.30. That corresponds to an earnings yield of approximately 10.8%.
Check out our latest analysis for Best Pacific International Holdings
How Do You Calculate A P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Best Pacific International Holdings:
P/E of 9.30 = HK$2.69 ÷ HK$0.29 (Based on the year to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.
Does Best Pacific International Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (9.4) for companies in the luxury industry is roughly the same as Best Pacific International Holdings's P/E.
Best Pacific International Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
It's great to see that Best Pacific International Holdings grew EPS by 12% in the last year. And its annual EPS growth rate over 5 years is 1.4%. With that performance, you might expect an above average P/E ratio. Unfortunately, earnings per share are down 9.3% a year, over 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.