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How Does Speedy Global Holdings's (HKG:540) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Speedy Global Holdings (HKG:540) shares have had a really impressive month, gaining 30%, after some slippage. While recent buyers might be laughing, long term holders might not be so pleased, since the recent gain only brings the full year return to evens.

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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

View our latest analysis for Speedy Global Holdings

How Does Speedy Global Holdings's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 7.88 that sentiment around Speedy Global Holdings isn't particularly high. The image below shows that Speedy Global Holdings has a lower P/E than the average (9.3) P/E for companies in the luxury industry.

SEHK:540 Price Estimation Relative to Market, January 12th 2020

This suggests that market participants think Speedy Global Holdings will underperform other companies in its industry. Since the market seems unimpressed with Speedy Global Holdings, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, 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 unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Speedy Global Holdings shrunk earnings per share by 3.2% last year. But it has grown its earnings per share by 6.9% per year over the last five years. And EPS is down 10% a year, over the last 3 years. So you wouldn't expect a very high P/E.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

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 Speedy Global Holdings's Balance Sheet Tell Us?

Net debt totals 22% of Speedy Global Holdings's market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Bottom Line On Speedy Global Holdings's P/E Ratio

Speedy Global Holdings has a P/E of 7.9. That's below the average in the HK market, which is 10.6. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. What we know for sure is that investors are becoming less uncomfortable about Speedy Global Holdings's prospects, since they have pushed its P/E ratio from 6.0 to 7.9 over the last month. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, 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 not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Speedy Global Holdings 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).

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.