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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 Wah Sun Handbags International Holdings Limited's (HKG:2683) P/E ratio to inform your assessment of the investment opportunity. Wah Sun Handbags International Holdings has a price to earnings ratio of 5.12, based on the last twelve months. In other words, at today's prices, investors are paying HK$5.12 for every HK$1 in prior year profit.
See our latest analysis for Wah Sun Handbags International Holdings
How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Wah Sun Handbags International Holdings:
P/E of 5.12 = HK$0.51 ÷ HK$0.10 (Based on the year to March 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing 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.
Does Wah Sun Handbags International Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Wah Sun Handbags International Holdings has a lower P/E than the average (9.2) in the luxury industry classification.
Its relatively low P/E ratio indicates that Wah Sun Handbags International Holdings 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. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Wah Sun Handbags International Holdings's earnings per share fell by 30% in the last twelve months.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.