What Does Pou Sheng International (Holdings) Limited's (HKG:3813) P/E Ratio Tell You?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Pou Sheng International (Holdings) Limited's (HKG:3813) P/E ratio and reflect on what it tells us about the company's share price. Pou Sheng International (Holdings) has a P/E ratio of 14.29, based on the last twelve months. In other words, at today's prices, investors are paying HK$14.29 for every HK$1 in prior year profit.

See our latest analysis for Pou Sheng International (Holdings)

How Do I Calculate Pou Sheng International (Holdings)'s Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Pou Sheng International (Holdings):

P/E of 14.29 = CNY1.81 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ CNY0.13 (Based on the year to September 2019.)

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. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price'.

Does Pou Sheng International (Holdings) Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (11.4) for companies in the specialty retail industry is lower than Pou Sheng International (Holdings)'s P/E.

That means that the market expects Pou Sheng International (Holdings) will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Pou Sheng International (Holdings)'s 64% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Pou Sheng International (Holdings)'s Debt Impact Its P/E Ratio?

Pou Sheng International (Holdings) has net debt equal to 27% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On Pou Sheng International (Holdings)'s P/E Ratio

Pou Sheng International (Holdings) has a P/E of 14.3. That's higher than the average in its market, which is 9.8. The company is not overly constrained by its modest debt levels, and its recent EPS growth is nothing short of stand-out. So on this analysis a high P/E ratio seems reasonable.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than Pou Sheng 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.