Should We Worry About Café de Coral Holdings Limited's (HKG:341) P/E Ratio?

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Café de Coral Holdings Limited's (HKG:341) P/E ratio could help you assess the value on offer. What is Café de Coral Holdings's P/E ratio? Well, based on the last twelve months it is 19.93. That means that at current prices, buyers pay HK$19.93 for every HK$1 in trailing yearly profits.

Check out our latest analysis for Café de Coral Holdings

How Do I Calculate Café de Coral Holdings's Price To Earnings Ratio?

The formula for P/E is:

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

Or for Café de Coral Holdings:

P/E of 19.93 = HKD17.56 ÷ HKD0.88 (Based on the year to September 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that buyers have to pay a higher price for each HKD1 the company has earned over the last year. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Does Café de Coral 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 Café de Coral Holdings has a higher P/E than the average (11.8) P/E for companies in the hospitality industry.

Its relatively high P/E ratio indicates that Café de Coral Holdings shareholders think it will perform better than other companies in its industry classification. 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Café de Coral Holdings's earnings per share grew by -6.3% in the last twelve months. Unfortunately, earnings per share are down 4.8% a year, over 5 years.

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

How Does Café de Coral Holdings's Debt Impact Its P/E Ratio?

Café de Coral Holdings has net cash of HK$608m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On Café de Coral Holdings's P/E Ratio

Café de Coral Holdings's P/E is 19.9 which is above average (10.1) in its market. EPS was up modestly better over the last twelve months. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come.

Investors have an opportunity when market expectations about a stock are wrong. 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.

You might be able to find a better buy than Café de Coral Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.