This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use Texwinca Holdings Limited's (HKG:321) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Texwinca Holdings's P/E ratio is 9.6. That corresponds to an earnings yield of approximately 10%.

Check out our latest analysis for Texwinca 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 Texwinca Holdings:

P/E of 9.6 = HK$2.26 ÷ HK$0.24 (Based on the year to March 2019.)

Is A High P/E 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 isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

How Does Texwinca Holdings's P/E Ratio Compare To Its Peers?

We can get an indication of market expectations by looking at the P/E ratio. As you can see below Texwinca Holdings has a P/E ratio that is fairly close for the average for the luxury industry, which is 9.6.

Its P/E ratio suggests that Texwinca Holdings shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Texwinca Holdings actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Texwinca Holdings saw earnings per share improve by -6.9% last year. Unfortunately, earnings per share are down 14% a year, over 5 years.

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

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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).