It's really great to see that even after a strong run, CSPC Pharmaceutical Group (HKG:1093) shares have been powering on, with a gain of 31% in the last thirty days. And the full year gain of 13% isn't too shabby, either!
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
Does CSPC Pharmaceutical Group Have A Relatively High Or Low P/E For Its Industry?
CSPC Pharmaceutical Group's P/E of 32.72 indicates some degree of optimism towards the stock. The image below shows that CSPC Pharmaceutical Group has a higher P/E than the average (12.1) P/E for companies in the pharmaceuticals industry.
Its relatively high P/E ratio indicates that CSPC Pharmaceutical Group shareholders think it will perform better than other companies in its industry classification. 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
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
CSPC Pharmaceutical Group increased earnings per share by a whopping 30% last year. And it has bolstered its earnings per share by 31% per year over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
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.
CSPC Pharmaceutical Group's Balance Sheet
CSPC Pharmaceutical Group has net cash of CN¥5.6b. 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 CSPC Pharmaceutical Group's P/E Ratio
CSPC Pharmaceutical Group trades on a P/E ratio of 32.7, which is multiples above its market average of 10.5. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). What we know for sure is that investors have become much more excited about CSPC Pharmaceutical Group recently, since they have pushed its P/E ratio from 24.9 to 32.7 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: CSPC Pharmaceutical Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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