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How Does Asia Allied Infrastructure Holdings's (HKG:711) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

It's really great to see that even after a strong run, Asia Allied Infrastructure Holdings (HKG:711) shares have been powering on, with a gain of 31% in the last thirty days. And the full year gain of 20% isn't too shabby, either!

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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.

Check out our latest analysis for Asia Allied Infrastructure Holdings

Does Asia Allied Infrastructure Holdings Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 11.40 that there is some investor optimism about Asia Allied Infrastructure Holdings. The image below shows that Asia Allied Infrastructure Holdings has a higher P/E than the average (9.9) P/E for companies in the construction industry.

SEHK:711 Price Estimation Relative to Market, October 18th 2019

That means that the market expects Asia Allied Infrastructure Holdings will outperform other companies in its industry. 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

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

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.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Asia Allied Infrastructure Holdings's Balance Sheet

Asia Allied Infrastructure Holdings has net debt equal to 44% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Bottom Line On Asia Allied Infrastructure Holdings's P/E Ratio

Asia Allied Infrastructure Holdings's P/E is 11.4 which is above average (10.4) in its market. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. What we know for sure is that investors have become more excited about Asia Allied Infrastructure Holdings recently, since they have pushed its P/E ratio from 8.7 to 11.4 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. 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 shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Asia Allied Infrastructure Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

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 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. Thank you for reading.