U.S. Markets closed

How Does Da Sen Holdings Group's (HKG:1580) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

The Da Sen Holdings Group (HKG:1580) share price has done well in the last month, posting a gain of 38%. Unfortunately, the full year gain of 3.4% wasn't so sweet.

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

View our latest analysis for Da Sen Holdings Group

How Does Da Sen Holdings Group's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 48.83 that there is some investor optimism about Da Sen Holdings Group. You can see in the image below that the average P/E (14.0) for companies in the forestry industry is a lot lower than Da Sen Holdings Group's P/E.

SEHK:1580 Price Estimation Relative to Market, October 22nd 2019

Its relatively high P/E ratio indicates that Da Sen Holdings Group 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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Da Sen Holdings Group's earnings per share fell by 73% in the last twelve months. And EPS is down 22% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.

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. So it won't reflect the advantage of cash, or disadvantage of debt. 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).

Da Sen Holdings Group's Balance Sheet

Da Sen Holdings Group's net debt is 0.4% of its market cap. 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 Da Sen Holdings Group's P/E Ratio

Da Sen Holdings Group has a P/E of 48.8. That's significantly higher than the average in its market, which is 10.4. 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 Da Sen Holdings Group over the last month, with the P/E ratio rising from 35.4 back then to 48.8 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

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 you might want to assess this data-rich visualization of earnings, revenue and cash flow.

You might be able to find a better buy than Da Sen Holdings Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.