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Unfortunately for some shareholders, the PPS International (Holdings) (HKG:8201) share price has dived 34% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 54% in that time.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. 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 PPS International (Holdings)
How Does PPS International (Holdings)'s P/E Ratio Compare To Its Peers?
PPS International (Holdings)'s P/E of 10.28 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (11.6) for companies in the commercial services industry is higher than PPS International (Holdings)'s P/E.
PPS International (Holdings)'s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
PPS International (Holdings) shrunk earnings per share by 58% over the last year. And over the longer term (5 years) earnings per share have decreased 33% annually. This could justify a pessimistic P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
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).