U.S. Markets close in 5 hrs 11 mins

How Does Best Pacific International Holdings's (HKG:2111) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

To the annoyance of some shareholders, Best Pacific International Holdings (HKG:2111) shares are down a considerable 31% in the last month. The recent drop has obliterated the annual return, with the share price now down 11% over that longer period.

All else being equal, a share price drop should make a stock more attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for Best Pacific International Holdings

Does Best Pacific International Holdings Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 6.67 that sentiment around Best Pacific International Holdings isn't particularly high. We can see in the image below that the average P/E (9.2) for companies in the luxury industry is higher than Best Pacific International Holdings's P/E.

SEHK:2111 Price Estimation Relative to Market, November 22nd 2019

Best Pacific International 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 Best Pacific International Holdings, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Best Pacific International Holdings increased earnings per share by an impressive 12% over the last twelve months. And earnings per share have improved by 1.4% annually, over the last five years. So one might expect an above average P/E ratio. Unfortunately, earnings per share are down 9.3% a year, over 3 years.

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

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

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

Best Pacific International Holdings has net debt worth 67% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Bottom Line On Best Pacific International Holdings's P/E Ratio

Best Pacific International Holdings has a P/E of 6.7. That's below the average in the HK market, which is 10.2. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If it continues to grow, then the current low P/E may prove to be unjustified. What can be absolutely certain is that the market has become more pessimistic about Best Pacific International Holdings over the last month, with the P/E ratio falling from 9.7 back then to 6.7 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Best Pacific International Holdings 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.