It's great to see Asia Allied Infrastructure Holdings (HKG:711) shareholders have their patience rewarded with a 35% share price pop in the last month. Unfortunately, the full year gain of 9.5% 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. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Does Asia Allied Infrastructure Holdings Have A Relatively High Or Low P/E For Its Industry?
Asia Allied Infrastructure Holdings's P/E is 10.99. As you can see below Asia Allied Infrastructure Holdings has a P/E ratio that is fairly close for the average for the construction industry, which is 10.2.
Asia Allied Infrastructure Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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.
Asia Allied Infrastructure Holdings's earnings per share fell by 16% in the last twelve months. And it has shrunk its earnings per share by 3.8% per year over the last five years. This could justify a pessimistic P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
How Does Asia Allied Infrastructure Holdings's Debt Impact Its P/E Ratio?
Net debt is 45% of Asia Allied Infrastructure Holdings's market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Asia Allied Infrastructure Holdings's P/E Ratio
Asia Allied Infrastructure Holdings trades on a P/E ratio of 11.0, which is fairly close to the HK market average of 10.4. Given it has some debt, but didn't grow last year, the P/E indicates the market is expecting higher profits ahead for the business. What is very clear is that the market has become more optimistic about Asia Allied Infrastructure Holdings over the last month, with the P/E ratio rising from 8.1 back then to 11.0 today. 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. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.
You might be able to find a better buy than Asia Allied Infrastructure 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).
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.
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. Thank you for reading.