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How Does Flat Glass Group's (HKG:6865) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

To the annoyance of some shareholders, Flat Glass Group (HKG:6865) shares are down a considerable 46% in the last month. Even longer term holders have taken a real hit with the stock declining 3.1% in the last year.

Assuming nothing else has changed, a lower share price makes a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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

Does Flat Glass Group Have A Relatively High Or Low P/E For Its Industry?

Flat Glass Group's P/E of 10.45 indicates relatively low sentiment towards the stock. The image below shows that Flat Glass Group has a lower P/E than the average (12.6) P/E for companies in the semiconductor industry.

SEHK:6865 Price Estimation Relative to Market, March 19th 2020

Its relatively low P/E ratio indicates that Flat Glass Group shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Flat Glass Group increased earnings per share by a whopping 49% last year. And it has bolstered its earnings per share by 2.6% per year over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high. But earnings per share are down 1.4% per year over the last three 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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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).

So What Does Flat Glass Group's Balance Sheet Tell Us?

Flat Glass Group has net debt worth just 8.2% of its market capitalization. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Verdict On Flat Glass Group's P/E Ratio

Flat Glass Group has a P/E of 10.4. That's higher than the average in its market, which is 8.6. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable. Given Flat Glass Group's P/E ratio has declined from 19.3 to 10.4 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal 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.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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