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How Does Goodbaby International Holdings's (HKG:1086) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Goodbaby International Holdings (HKG:1086) shares have had a really impressive month, gaining 35%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 43% in the last 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.

View our latest analysis for Goodbaby International Holdings

How Does Goodbaby International Holdings's P/E Ratio Compare To Its Peers?

Goodbaby International Holdings's P/E of 15.72 indicates some degree of optimism towards the stock. As you can see below, Goodbaby International Holdings has a higher P/E than the average company (8.1) in the leisure industry.

SEHK:1086 Price Estimation Relative to Market, November 26th 2019

Its relatively high P/E ratio indicates that Goodbaby International Holdings shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

Goodbaby International Holdings's earnings per share fell by 20% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 8.5% annually. This might lead to muted expectations.

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. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

Goodbaby International Holdings's Balance Sheet

Net debt totals 71% of Goodbaby International Holdings's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Verdict On Goodbaby International Holdings's P/E Ratio

Goodbaby International Holdings has a P/E of 15.7. That's higher than the average in its market, which is 10.2. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future. What we know for sure is that investors have become more excited about Goodbaby International Holdings recently, since they have pushed its P/E ratio from 11.6 to 15.7 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.

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. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than Goodbaby International Holdings. 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.