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How Does Ching Lee Holdings's (HKG:3728) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Ching Lee Holdings (HKG:3728) shares have had a really impressive month, gaining 35%, after some slippage. The full year gain of 17% is pretty reasonable, too.

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. 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 Ching Lee Holdings

Does Ching Lee Holdings Have A Relatively High Or Low P/E For Its Industry?

Ching Lee Holdings's P/E of 32.59 indicates some degree of optimism towards the stock. As you can see below, Ching Lee Holdings has a much higher P/E than the average company (9.8) in the construction industry.

SEHK:3728 Price Estimation Relative to Market, January 6th 2020

Its relatively high P/E ratio indicates that Ching Lee Holdings shareholders think it will perform better than other companies in its industry classification. 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

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. Then, a higher P/E might scare off shareholders, pushing the share price down.

Ching Lee Holdings shrunk earnings per share by 59% over the last year. And EPS is down 19% a year, over the last 5 years. This could justify a pessimistic P/E.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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).

Is Debt Impacting Ching Lee Holdings's P/E?

Ching Lee Holdings has net debt equal to 41% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Bottom Line On Ching Lee Holdings's P/E Ratio

Ching Lee Holdings trades on a P/E ratio of 32.6, which is multiples above its market average of 10.7. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years. What we know for sure is that investors have become much more excited about Ching Lee Holdings recently, since they have pushed its P/E ratio from 24.1 to 32.6 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.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but you might want to assess this data-rich visualization 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.