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 Come Sure Group (Holdings) Limited’s (HKG:794) P/E ratio to inform your assessment of the investment opportunity. Come Sure Group (Holdings) has a price to earnings ratio of 4.27, based on the last twelve months. In other words, at today’s prices, investors are paying HK$4.27 for every HK$1 in prior year profit.
See our latest analysis for Come Sure Group (Holdings)
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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 Come Sure Group (Holdings):
P/E of 4.27 = HK$0.79 ÷ HK$0.19 (Based on the trailing twelve months to September 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
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. When earnings grow, the ‘E’ increases, over time. 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.
Come Sure Group (Holdings)’s earnings per share fell by 2.6% in the last twelve months. But EPS is up 16% over the last 5 years.
How Does Come Sure Group (Holdings)’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Come Sure Group (Holdings) has a lower P/E than the average (12.2) P/E for companies in the packaging industry.
Come Sure Group (Holdings)’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Come Sure Group (Holdings), it’s quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting Come Sure Group (Holdings)’s P/E?
Net debt totals 66% of Come Sure Group (Holdings)’s market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Come Sure Group (Holdings)’s P/E Ratio
Come Sure Group (Holdings) trades on a P/E ratio of 4.3, which is below the HK market average of 10.3. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ Although we don’t have analyst forecasts, you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.
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