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How Does Sprocomm Intelligence's (HKG:1401) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the Sprocomm Intelligence (HKG:1401) share price has dived 30% in the last thirty days. The bad news is that the recent drop obliterated the last year's worth of gains; the stock is flat over twelve months.

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. 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). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

View our latest analysis for Sprocomm Intelligence

Does Sprocomm Intelligence Have A Relatively High Or Low P/E For Its Industry?

Sprocomm Intelligence has a P/E ratio of 9.38. As you can see below Sprocomm Intelligence has a P/E ratio that is fairly close for the average for the tech industry, which is 9.2.

SEHK:1401 Price Estimation Relative to Market April 2nd 2020
SEHK:1401 Price Estimation Relative to Market April 2nd 2020

Its P/E ratio suggests that Sprocomm Intelligence shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Sprocomm Intelligence shrunk earnings per share by 25% over the last year. And it has shrunk its earnings per share by 31% per year over the last five years. This might lead to muted expectations.

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. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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 Sprocomm Intelligence's P/E?

With net cash of CN¥206m, Sprocomm Intelligence has a very strong balance sheet, which may be important for its business. Having said that, at 44% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Sprocomm Intelligence's P/E Ratio

Sprocomm Intelligence has a P/E of 9.4. That's around the same as the average in the HK market, which is 9.1. While the lack of recent growth is probably muting optimism, the healthy balance sheet means the company retains potential for future growth. So it's not surprising to see it trade on a P/E roughly in line with the market. What can be absolutely certain is that the market has become more pessimistic about Sprocomm Intelligence over the last month, with the P/E ratio falling from 13.4 back then to 9.4 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.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but shareholders might want to examine this 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.