Cowell e Holdings (HKG:1415) shares have had a really impressive month, gaining 30%, after some slippage. Looking back a bit further, we're also happy to report the stock is up 61% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Does Cowell e Holdings Have A Relatively High Or Low P/E For Its Industry?
Cowell e Holdings's P/E is 9.62. You can see in the image below that the average P/E (9.3) for companies in the electronic industry is roughly the same as Cowell e Holdings's P/E.
Cowell e Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. 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. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Cowell e Holdings saw earnings per share improve by -7.8% last year. Unfortunately, earnings per share are down 21% a year, over 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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.
Cowell e Holdings's Balance Sheet
With net cash of US$160m, Cowell e Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 97% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Cowell e Holdings's P/E Ratio
Cowell e Holdings's P/E is 9.6 which is about average (10.3) in the HK market. Earnings improved over the last year. And the net cash position gives the company many options. The average P/E suggests the market isn't overly optimistic, though. What is very clear is that the market has become less pessimistic about Cowell e Holdings over the last month, with the P/E ratio rising from 7.4 back then to 9.6 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Cowell e Holdings. 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).
If you spot an error that warrants correction, please contact the editor at email@example.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.