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How Does Eagle Nice (International) Holdings's (HKG:2368) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Eagle Nice (International) Holdings (HKG:2368) shares have had a really impressive month, gaining 42%, after some slippage. The bad news is that even after that recovery shareholders are still underwater by about 2.5% for the full 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. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Eagle Nice (International) Holdings

How Does Eagle Nice (International) Holdings's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 11.17 that there is some investor optimism about Eagle Nice (International) Holdings. As you can see below, Eagle Nice (International) Holdings has a higher P/E than the average company (9.2) in the luxury industry.

SEHK:2368 Price Estimation Relative to Market, October 31st 2019

That means that the market expects Eagle Nice (International) Holdings will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Eagle Nice (International) Holdings saw earnings per share decrease by 40% last year. But EPS is up 45% over the last 5 years.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.

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.

So What Does Eagle Nice (International) Holdings's Balance Sheet Tell Us?

Net debt totals 20% of Eagle Nice (International) Holdings's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Verdict On Eagle Nice (International) Holdings's P/E Ratio

Eagle Nice (International) Holdings has a P/E of 11.2. That's higher than the average in its market, which is 10.3. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. What is very clear is that the market has become more optimistic about Eagle Nice (International) Holdings over the last month, with the P/E ratio rising from 7.9 back then to 11.2 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Eagle Nice (International) Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.