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How Does S-Enjoy Service Group's (HKG:1755) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

The S-Enjoy Service Group (HKG:1755) share price has done well in the last month, posting a gain of 47%. While recent buyers might be laughing, long term holders might not be so pleased, since the recent gain only brings the full year return to evens.

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.

Check out our latest analysis for S-Enjoy Service Group

How Does S-Enjoy Service Group's P/E Ratio Compare To Its Peers?

S-Enjoy Service Group's P/E of 26.38 indicates some degree of optimism towards the stock. The image below shows that S-Enjoy Service Group has a higher P/E than the average (13.8) P/E for companies in the commercial services industry.

SEHK:1755 Price Estimation Relative to Market, October 25th 2019

Its relatively high P/E ratio indicates that S-Enjoy Service Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

S-Enjoy Service Group's earnings made like a rocket, taking off 88% last year.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting S-Enjoy Service Group's P/E?

With net cash of CN¥1.2b, S-Enjoy Service Group has a very strong balance sheet, which may be important for its business. Having said that, at 17% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On S-Enjoy Service Group's P/E Ratio

S-Enjoy Service Group has a P/E of 26.4. That's higher than the average in its market, which is 10.3. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect S-Enjoy Service Group to have a high P/E ratio. What we know for sure is that investors have become much more excited about S-Enjoy Service Group recently, since they have pushed its P/E ratio from 17.9 to 26.4 over the last month. 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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: S-Enjoy Service 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).

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.