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How Does China Saite Group's (HKG:153) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

China Saite Group (HKG:153) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month alone, although it is still down 18% over the last quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 65% share price decline throughout the 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. 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 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.

View our latest analysis for China Saite Group

How Does China Saite Group's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 3.37 that sentiment around China Saite Group isn't particularly high. If you look at the image below, you can see China Saite Group has a lower P/E than the average (10.5) in the construction industry classification.

SEHK:153 Price Estimation Relative to Market, November 28th 2019

Its relatively low P/E ratio indicates that China Saite Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with China Saite Group, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. 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.

China Saite Group shrunk earnings per share by 55% over the last year. And EPS is down 24% a year, over the last 5 years. This could justify a pessimistic P/E.

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. 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.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

How Does China Saite Group's Debt Impact Its P/E Ratio?

China Saite Group's net debt is 2.2% of its market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Bottom Line On China Saite Group's P/E Ratio

China Saite Group has a P/E of 3.4. That's below the average in the HK market, which is 10.2. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth. What is very clear is that the market has become less pessimistic about China Saite Group over the last month, with the P/E ratio rising from 2.5 back then to 3.4 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, 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.

But note: China Saite 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.