Unfortunately for some shareholders, the Zhejiang Tengy Environmental Technology (HKG:1527) share price has dived 30% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 56% drop over twelve months.
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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock 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.
Does Zhejiang Tengy Environmental Technology Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 5.22 that sentiment around Zhejiang Tengy Environmental Technology isn't particularly high. We can see in the image below that the average P/E (9.7) for companies in the machinery industry is higher than Zhejiang Tengy Environmental Technology's P/E.
Zhejiang Tengy Environmental Technology's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Zhejiang Tengy Environmental Technology's earnings per share grew by 9.8% in the last twelve months. But earnings per share are down 19% per year over the last five 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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 Zhejiang Tengy Environmental Technology's Balance Sheet Tell Us?
Zhejiang Tengy Environmental Technology's net debt equates to 48% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Zhejiang Tengy Environmental Technology's P/E Ratio
Zhejiang Tengy Environmental Technology has a P/E of 5.2. That's below the average in the HK market, which is 9.2. EPS grew over the last twelve months, and debt levels are quite reasonable. The P/E ratio implies the market is cautious about longer term prospects. What can be absolutely certain is that the market has become more pessimistic about Zhejiang Tengy Environmental Technology over the last month, with the P/E ratio falling from 7.5 back then to 5.2 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
Investors have an opportunity when market expectations about a stock are wrong. 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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than Zhejiang Tengy Environmental Technology. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at email@example.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.