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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

It's really great to see that even after a strong run, S-Enjoy Service Group (HKG:1755) shares have been powering on, with a gain of 43% in the last thirty days. Zooming out, the annual gain of 220% knocks our socks off.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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). 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 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 S-Enjoy Service Group

Does S-Enjoy Service Group Have A Relatively High Or Low P/E For Its Industry?

S-Enjoy Service Group's P/E of 29.70 indicates some degree of optimism towards the stock. As you can see below, S-Enjoy Service Group has a higher P/E than the average company (12.7) in the commercial services industry.

SEHK:1755 Price Estimation Relative to Market, November 12th 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

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. 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.

In the last year, S-Enjoy Service Group grew EPS like Taylor Swift grew her fan base back in 2010; the 88% gain was both fast and well deserved.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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 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 S-Enjoy Service Group's Balance Sheet Tell Us?

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 trades on a P/E ratio of 29.7, which is above its market average of 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 20.8 to 29.7 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 should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than S-Enjoy Service 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.