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How Does Zhejiang Tengy Environmental Technology's (HKG:1527) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

Unfortunately for some shareholders, the Zhejiang Tengy Environmental Technology (HKG:1527) share price has dived 31% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 32% in that time.

All else being equal, a share price drop should make a stock more 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 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Zhejiang Tengy Environmental Technology

How Does Zhejiang Tengy Environmental Technology's P/E Ratio Compare To Its Peers?

Zhejiang Tengy Environmental Technology's P/E of 11.51 indicates some degree of optimism towards the stock. The image below shows that Zhejiang Tengy Environmental Technology has a higher P/E than the average (10.1) P/E for companies in the machinery industry.

SEHK:1527 Price Estimation Relative to Market, February 7th 2020

That means that the market expects Zhejiang Tengy Environmental Technology will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Zhejiang Tengy Environmental Technology's earnings per share fell by 68% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 4.9% annually. This might lead to muted expectations.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

Is Debt Impacting Zhejiang Tengy Environmental Technology's P/E?

Net debt is 30% of Zhejiang Tengy Environmental Technology's market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On Zhejiang Tengy Environmental Technology's P/E Ratio

Zhejiang Tengy Environmental Technology trades on a P/E ratio of 11.5, which is above its market average of 9.9. With some debt but no EPS growth last year, the market has high expectations of future profits. What can be absolutely certain is that the market has become significantly less optimistic about Zhejiang Tengy Environmental Technology over the last month, with the P/E ratio falling from 16.8 back then to 11.5 today. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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. 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.

Of course you might be able to find a better stock than Zhejiang Tengy Environmental Technology. 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.