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What Is China Golden Classic Group's (HKG:8281) P/E Ratio After Its Share Price Tanked?

To the annoyance of some shareholders, China Golden Classic Group (HKG:8281) shares are down a considerable 32% in the last month. That drop has capped off a tough year for shareholders, with the share price down 34% in that time.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for China Golden Classic Group

How Does China Golden Classic Group's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 64.59 that there is some investor optimism about China Golden Classic Group. You can see in the image below that the average P/E (16.7) for companies in the personal products industry is a lot lower than China Golden Classic Group's P/E.

SEHK:8281 Price Estimation Relative to Market, January 23rd 2020
SEHK:8281 Price Estimation Relative to Market, January 23rd 2020

China Golden Classic Group's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

China Golden Classic Group shrunk earnings per share by 60% over the last year. And it has shrunk its earnings per share by 53% per year over the last three years. This growth rate might warrant a low P/E ratio.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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).

So What Does China Golden Classic Group's Balance Sheet Tell Us?

China Golden Classic Group has net cash of CN¥8.8m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Bottom Line On China Golden Classic Group's P/E Ratio

With a P/E ratio of 64.6, China Golden Classic Group is expected to grow earnings very strongly in the years to come. Falling earnings per share is probably keeping traditional value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will! What can be absolutely certain is that the market has become significantly less optimistic about China Golden Classic Group over the last month, with the P/E ratio falling from 95.0 back then to 64.6 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.