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How Does Flat Glass Group's (HKG:6865) 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, Flat Glass Group (HKG:6865) shares have been powering on, with a gain of 36% in the last thirty days. Zooming out, the annual gain of 165% knocks our socks off.

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). 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.

See our latest analysis for Flat Glass Group

How Does Flat Glass Group's P/E Ratio Compare To Its Peers?

Flat Glass Group's P/E is 16.20. As you can see below Flat Glass Group has a P/E ratio that is fairly close for the average for the semiconductor industry, which is 15.8.

SEHK:6865 Price Estimation Relative to Market, January 10th 2020

That indicates that the market expects Flat Glass Group will perform roughly in line with other companies in its industry. So if Flat Glass Group actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Notably, Flat Glass Group grew EPS by a whopping 49% in the last year. And earnings per share have improved by 2.6% annually, over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high. In contrast, EPS has decreased by 1.4%, annually, over 3 years.

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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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).

How Does Flat Glass Group's Debt Impact Its P/E Ratio?

Flat Glass Group has net debt worth just 6.4% of its market capitalization. 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 Bottom Line On Flat Glass Group's P/E Ratio

Flat Glass Group trades on a P/E ratio of 16.2, which is above its market average of 10.6. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So to be frank we are not surprised it has a high P/E ratio. What is very clear is that the market has become more optimistic about Flat Glass Group over the last month, with the P/E ratio rising from 12.0 back then to 16.2 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.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Flat Glass Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.