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How Does Biosino Bio-Technology and Science Incorporation's (HKG:8247) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Biosino Bio-Technology and Science Incorporation (HKG:8247) shares have had a really impressive month, gaining 31%, after some slippage. The bad news is that even after that recovery shareholders are still underwater by about 5.2% for the full year.

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. 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 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.

See our latest analysis for Biosino Bio-Technology and Science Incorporation

How Does Biosino Bio-Technology and Science Incorporation's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 26.61 that there is some investor optimism about Biosino Bio-Technology and Science Incorporation. As you can see below, Biosino Bio-Technology and Science Incorporation has a higher P/E than the average company (23.8) in the biotechs industry.

SEHK:8247 Price Estimation Relative to Market, December 4th 2019

That means that the market expects Biosino Bio-Technology and Science Incorporation will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Biosino Bio-Technology and Science Incorporation shrunk earnings per share by 49% over the last year. But over the longer term (3 years), earnings per share have increased by 41%. And it has shrunk its earnings per share by 7.7% 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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.

Biosino Bio-Technology and Science Incorporation's Balance Sheet

Biosino Bio-Technology and Science Incorporation's net debt equates to 50% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Biosino Bio-Technology and Science Incorporation's P/E Ratio

Biosino Bio-Technology and Science Incorporation's P/E is 26.6 which is above average (10.1) in its market. With some debt but no EPS growth last year, the market has high expectations of future profits. What is very clear is that the market has become significantly more optimistic about Biosino Bio-Technology and Science Incorporation over the last month, with the P/E ratio rising from 20.3 back then to 26.6 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.

Investors should be looking to buy stocks that the market is wrong about. 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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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.