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How Does DaChan Food (Asia)'s (HKG:3999) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

It's really great to see that even after a strong run, DaChan Food (Asia) (HKG:3999) shares have been powering on, with a gain of 30% in the last thirty days. That brought the twelve month gain to a very sharp 54%.

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. 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.

View our latest analysis for DaChan Food (Asia)

Does DaChan Food (Asia) Have A Relatively High Or Low P/E For Its Industry?

DaChan Food (Asia)'s P/E of 10.60 indicates relatively low sentiment towards the stock. If you look at the image below, you can see DaChan Food (Asia) has a lower P/E than the average (16.0) in the food industry classification.

SEHK:3999 Price Estimation Relative to Market, November 11th 2019

Its relatively low P/E ratio indicates that DaChan Food (Asia) shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with DaChan Food (Asia), 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

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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

DaChan Food (Asia) shrunk earnings per share by 15% over the last year. But over the longer term (5 years) earnings per share have increased by 14%.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

DaChan Food (Asia)'s Balance Sheet

DaChan Food (Asia)'s net debt is considerable, at 110% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Verdict On DaChan Food (Asia)'s P/E Ratio

DaChan Food (Asia) trades on a P/E ratio of 10.6, which is fairly close to the HK market average of 10.5. With relatively high debt, and no earnings per share growth over twelve months, the P/E suggests that many have an expectation that company will find some growth. What is very clear is that the market has become more optimistic about DaChan Food (Asia) over the last month, with the P/E ratio rising from 8.1 back then to 10.6 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: DaChan Food (Asia) 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).

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.