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Unfortunately for some shareholders, the Pico Far East Holdings (HKG:752) share price has dived 31% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 57% in that time.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Check out our latest analysis for Pico Far East Holdings
Does Pico Far East Holdings Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 6.50 that sentiment around Pico Far East Holdings isn't particularly high. The image below shows that Pico Far East Holdings has a lower P/E than the average (11.0) P/E for companies in the media industry.
This suggests that market participants think Pico Far East Holdings will underperform other companies in its industry. 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
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Pico Far East Holdings saw earnings per share decrease by 5.7% last year. And it has shrunk its earnings per share by 5.5% per year over the last three years. This growth rate might warrant a low P/E ratio. So it would be surprising to see a high P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.