U.S. Markets close in 3 hrs 3 mins

How Does Pentamaster International's (HKG:1665) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Pentamaster International (HKG:1665) shares have continued recent momentum with a 36% gain in the last month alone. Looking back a bit further, we're also happy to report the stock is up 58% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less 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 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.

Check out our latest analysis for Pentamaster International

Does Pentamaster International Have A Relatively High Or Low P/E For Its Industry?

Pentamaster International has a P/E ratio of 13.69. As you can see below Pentamaster International has a P/E ratio that is fairly close for the average for the semiconductor industry, which is 14.0.

SEHK:1665 Price Estimation Relative to Market, October 3rd 2019

Pentamaster International's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Pentamaster International actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

In the last year, Pentamaster International grew EPS like Taylor Swift grew her fan base back in 2010; the 63% gain was both fast and well deserved.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. 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.

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.

How Does Pentamaster International's Debt Impact Its P/E Ratio?

Pentamaster International has net cash of RM286m. This is fairly high at 18% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Pentamaster International's P/E Ratio

Pentamaster International has a P/E of 13.7. That's higher than the average in its market, which is 10.5. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). What is very clear is that the market has become more optimistic about Pentamaster International over the last month, with the P/E ratio rising from 10.1 back then to 13.7 today. 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 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 report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Pentamaster International 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.