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How Does China Industrial Securities International Financial Group's (HKG:6058) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Those holding China Industrial Securities International Financial Group (HKG:6058) shares must be pleased that the share price has rebounded 31% in the last thirty days. But unfortunately, the stock is still down by 24% over a quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 70% share price decline throughout the 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. 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.

See our latest analysis for China Industrial Securities International Financial Group

Does China Industrial Securities International Financial Group Have A Relatively High Or Low P/E For Its Industry?

China Industrial Securities International Financial Group's P/E of 6.50 indicates relatively low sentiment towards the stock. If you look at the image below, you can see China Industrial Securities International Financial Group has a lower P/E than the average (12.7) in the capital markets industry classification.

SEHK:6058 Price Estimation Relative to Market, December 31st 2019

China Industrial Securities International Financial Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You 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. Then, a higher P/E might scare off shareholders, pushing the share price down.

Notably, China Industrial Securities International Financial Group grew EPS by a whopping 46% in the last year. In contrast, EPS has decreased by 18%, annually, over 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

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. 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.

China Industrial Securities International Financial Group's Balance Sheet

China Industrial Securities International Financial Group has net debt worth just 1.0% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Verdict On China Industrial Securities International Financial Group's P/E Ratio

China Industrial Securities International Financial Group trades on a P/E ratio of 6.5, which is below the HK market average of 10.5. The company does have a little debt, and EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What we know for sure is that investors are becoming less uncomfortable about China Industrial Securities International Financial Group's prospects, since they have pushed its P/E ratio from 4.9 to 6.5 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors have an opportunity when market expectations about a stock are wrong. 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.

But note: China Industrial Securities International Financial 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).

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.