Does Kasen International Holdings Limited's (HKG:496) P/E Ratio Signal A Buying Opportunity?

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Kasen International Holdings Limited's (HKG:496) P/E ratio and reflect on what it tells us about the company's share price. Kasen International Holdings has a P/E ratio of 4.51, based on the last twelve months. That means that at current prices, buyers pay HK$4.51 for every HK$1 in trailing yearly profits.

View our latest analysis for Kasen International Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)

Or for Kasen International Holdings:

P/E of 4.51 = CN¥1.316 ÷ CN¥0.292 (Based on the year to December 2019.)

(Note: the above calculation uses the share price in the reporting currency, namely CNY and the calculation results may not be precise due to rounding.)

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 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 Kasen International Holdings's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. If you look at the image below, you can see Kasen International Holdings has a lower P/E than the average (10.1) in the consumer durables industry classification.

Kasen 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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Kasen International Holdings saw earnings per share decrease by 3.1% last year. But EPS is up 64% over the last 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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

How Does Kasen International Holdings's Debt Impact Its P/E Ratio?

Net debt is 33% of Kasen International Holdings's market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Verdict On Kasen International Holdings's P/E Ratio

Kasen International Holdings trades on a P/E ratio of 4.5, which is below the HK market average of 9.1. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but 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 be able to find a better stock than Kasen International Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.