Here’s What DaChan Food (Asia) Limited’s (HKG:3999) P/E Ratio Is Telling Us

Julian Fleming

Wed, Feb 6, 2019, 6:15 PM

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We’ll show how you can use DaChan Food (Asia) Limited’s (HKG:3999) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, DaChan Food (Asia)’s P/E ratio is 5.72. That corresponds to an earnings yield of approximately 17%.

View our latest analysis for DaChan Food (Asia)

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)

Or for DaChan Food (Asia):

P/E of 5.72 = CN¥0.34 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CN¥0.059 (Based on the trailing twelve months to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

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 unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

It’s nice to see that DaChan Food (Asia) grew EPS by a stonking 260% in the last year. And it has bolstered its earnings per share by 28% per year over the last five years. So we’d generally expect it to have a relatively high P/E ratio.

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

We can get an indication of market expectations by looking at the P/E ratio. We can see in the image below that the average P/E (12.9) for companies in the food industry is higher than DaChan Food (Asia)’s P/E.

This suggests that market participants think DaChan Food (Asia) will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

Remember: P/E Ratios Don’t Consider The Balance Sheet

Don’t forget that the P/E ratio considers market capitalization. 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 taking on debt (or spending its remaining cash).