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What Does Samsonite International S.A.'s (HKG:1910) P/E Ratio Tell You?

Simply Wall St

The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll show how you can use Samsonite International S.A.'s ( HKG:1910 ) P/E ratio to inform your assessment of the investment opportunity. Samsonite International has a P/E ratio of 14.36 , based on the last twelve months. In other words, at today's prices, investors are paying HK$14.36 for every HK$1 in prior year profit.

Check out our latest analysis for Samsonite International

How Do You Calculate Samsonite International's P/E Ratio?

The formula for price to earnings is:

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

Or for Samsonite International:

P/E of 14.36 = $2.18 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.15 (Based on the year to June 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. 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.

Does Samsonite International Have A Relatively High Or Low P/E For Its Industry?

One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Samsonite International has a higher P/E than the average (9.2) P/E for companies in the luxury industry.

SEHK:1910 Price Estimation Relative to Market, August 22nd 2019

Its relatively high P/E ratio indicates that Samsonite International shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling .

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Samsonite International shrunk earnings per share by 32% over the last year. But over the longer term (5 years) earnings per share have increased by 2.6%.

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

The 'Price' in P/E reflects the market capitalization of the company. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Samsonite International's Balance Sheet

Samsonite International has net debt worth 54% 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 Samsonite International's P/E Ratio

Samsonite International has a P/E of 14.4. That's higher than the average in its market, which is 9.9. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future.

Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Samsonite International. 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).

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.