Read This Before You Buy Winson Holdings Hong Kong Limited (HKG:8421) Because Of Its P/E Ratio

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at Winson Holdings Hong Kong Limited's (HKG:8421) P/E ratio and reflect on what it tells us about the company's share price. What is Winson Holdings Hong Kong's P/E ratio? Well, based on the last twelve months it is 11.88. That is equivalent to an earnings yield of about 8.4%.

View our latest analysis for Winson Holdings Hong Kong

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Winson Holdings Hong Kong:

P/E of 11.88 = HKD0.46 ÷ HKD0.04 (Based on the trailing twelve months to December 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HKD1 of company earnings. 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'.

How Does Winson Holdings Hong Kong's P/E Ratio Compare To Its Peers?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. You can see in the image below that the average P/E (12.4) for companies in the commercial services industry is roughly the same as Winson Holdings Hong Kong's P/E.

Winson Holdings Hong Kong's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. 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.

It's nice to see that Winson Holdings Hong Kong grew EPS by a stonking 26% in the last year. And it has improved its earnings per share by 27% per year over the last three years. With that performance, I would expect it to have an above average P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Winson Holdings Hong Kong's Balance Sheet

With net cash of HK$41m, Winson Holdings Hong Kong has a very strong balance sheet, which may be important for its business. Having said that, at 15% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Winson Holdings Hong Kong's P/E Ratio

Winson Holdings Hong Kong's P/E is 11.9 which is above average (9.9) in its market. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. So it does not seem strange that the P/E is above average.

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. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: Winson Holdings Hong Kong may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.