What Is Shenglong Splendecor International's (HKG:8481) P/E Ratio After Its Share Price Rocketed?
It's really great to see that even after a strong run, Shenglong Splendecor International (HKG:8481) shares have been powering on, with a gain of 35% in the last thirty days. Unfortunately, the full year gain of 6.3% wasn't so sweet.
All else being equal, a sharp share price increase should make a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors' expectations of a business 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 Shenglong Splendecor International
Does Shenglong Splendecor International Have A Relatively High Or Low P/E For Its Industry?
Shenglong Splendecor International's P/E of 10.85 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Shenglong Splendecor International has a lower P/E than the average (11.9) in the commercial services industry classification.
Shenglong Splendecor International's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, 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 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.
Shenglong Splendecor International's earnings made like a rocket, taking off 170% last year. Regrettably, the longer term performance is poor, with EPS down -1.1% per year over 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
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.
How Does Shenglong Splendecor International's Debt Impact Its P/E Ratio?
Shenglong Splendecor International has net debt worth 58% 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 Shenglong Splendecor International's P/E Ratio
Shenglong Splendecor International trades on a P/E ratio of 10.8, which is fairly close to the HK market average of 10.6. It does have enough debt to add risk, although earnings growth was strong in the last year. However, the P/E ratio implies that most doubt the strong growth will continue. What we know for sure is that investors have become more excited about Shenglong Splendecor International recently, since they have pushed its P/E ratio from 8.0 to 10.8 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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.
