To the annoyance of some shareholders, Glory Sun Financial Group (HKG:1282) shares are down a considerable 31% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 31% drop 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. 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.
Does Glory Sun Financial Group Have A Relatively High Or Low P/E For Its Industry?
Glory Sun Financial Group's P/E is 9.10. You can see in the image below that the average P/E (9.6) for companies in the tech industry is roughly the same as Glory Sun Financial Group's P/E.
Glory Sun Financial Group's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Glory Sun Financial Group actually outperforms its peers going forward, that should be a positive for the share price. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Glory Sun Financial Group saw earnings per share decrease by 31% last year. But over the longer term (3 years), earnings per share have increased by 29%.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
Glory Sun Financial Group's Balance Sheet
Glory Sun Financial Group's net debt is 89% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On Glory Sun Financial Group's P/E Ratio
Glory Sun Financial Group's P/E is 9.1 which is about average (9.8) in the HK market. With meaningful debt, and no earnings per share growth last year, even an average P/E indicates that the market a significant improvement from the business. What can be absolutely certain is that the market has become more pessimistic about Glory Sun Financial Group over the last month, with the P/E ratio falling from 13.2 back then to 9.1 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. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts 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 be able to find a better stock than Glory Sun Financial Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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