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Should We Worry About Fantasia Holdings Group Co., Limited's (HKG:1777) P/E Ratio?

Simply Wall St

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Fantasia Holdings Group Co., Limited's (HKG:1777) P/E ratio and reflect on what it tells us about the company's share price. Fantasia Holdings Group has a price to earnings ratio of 9.07, based on the last twelve months. That is equivalent to an earnings yield of about 11.0%.

See our latest analysis for Fantasia Holdings Group

How Do You Calculate A P/E Ratio?

The formula for P/E is:

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

Or for Fantasia Holdings Group:

P/E of 9.07 = HK$1.15 (Note: this is the share price in the reporting currency, namely, CNY ) ÷ HK$0.13 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each HK$1 of company earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

Does Fantasia Holdings Group Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. As you can see below, Fantasia Holdings Group has a higher P/E than the average company (6.6) in the real estate industry.

SEHK:1777 Price Estimation Relative to Market, November 6th 2019

That means that the market expects Fantasia Holdings Group will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. 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. Then, a higher P/E might scare off shareholders, pushing the share price down.

Fantasia Holdings Group's earnings per share fell by 38% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 7.2% annually. This growth rate might warrant a below average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

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.

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 Fantasia Holdings Group's P/E?

Fantasia Holdings Group's net debt is considerable, at 228% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Verdict On Fantasia Holdings Group's P/E Ratio

Fantasia Holdings Group trades on a P/E ratio of 9.1, which is below the HK market average of 10.4. 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 the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Fantasia Holdings Group 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).

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.