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Does Carrianna Group Holdings Company Limited's (HKG:126) P/E Ratio Signal A Buying Opportunity?

Today, we'll introduce the concept of the P/E ratio for those who are learning about investing. We'll show how you can use Carrianna Group Holdings Company Limited's (HKG:126) P/E ratio to inform your assessment of the investment opportunity. Carrianna Group Holdings has a P/E ratio of 3.62, based on the last twelve months. In other words, at today's prices, investors are paying HK$3.62 for every HK$1 in prior year profit.

View our latest analysis for Carrianna Group Holdings

How Do I Calculate A Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Carrianna Group Holdings:

P/E of 3.62 = HK$0.80 ÷ HK$0.22 (Based on the year to March 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.

How Does Carrianna Group 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 Carrianna Group Holdings has a lower P/E than the average (12.2) in the hospitality industry classification.

SEHK:126 Price Estimation Relative to Market, November 12th 2019
SEHK:126 Price Estimation Relative to Market, November 12th 2019

This suggests that market participants think Carrianna Group Holdings will underperform other companies in its industry. Since the market seems unimpressed with Carrianna Group 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

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Carrianna Group Holdings shrunk earnings per share by 12% over the last year. But over the longer term (5 years) earnings per share have increased by 6.6%.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

Is Debt Impacting Carrianna Group Holdings's P/E?

Carrianna Group Holdings has net debt worth 99% of its market capitalization. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Carrianna Group Holdings's P/E Ratio

Carrianna Group Holdings trades on a P/E ratio of 3.6, which is below the HK market average of 10.3. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations.

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

Of course you might be able to find a better stock than Carrianna Group Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.

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