S-Enjoy Service Group (HKG:1755) shares have had a really impressive month, gaining 31%, 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.
Does S-Enjoy Service Group Have A Relatively High Or Low P/E For Its Industry?
S-Enjoy Service Group's P/E of 21.07 indicates some degree of optimism towards the stock. The image below shows that S-Enjoy Service Group has a higher P/E than the average (13.2) P/E for companies in the commercial services industry.
Its relatively high P/E ratio indicates that S-Enjoy Service Group 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 investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
S-Enjoy Service Group's earnings made like a rocket, taking off 88% last year.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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 S-Enjoy Service Group's Balance Sheet Tell Us?
With net cash of CN¥1.2b, S-Enjoy Service Group has a very strong balance sheet, which may be important for its business. Having said that, at 21% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On S-Enjoy Service Group's P/E Ratio
S-Enjoy Service Group has a P/E of 21.1. That's higher than the average in its market, which is 10.2. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect S-Enjoy Service Group to have a high P/E ratio. What we know for sure is that investors have become much more excited about S-Enjoy Service Group recently, since they have pushed its P/E ratio from 16.0 to 21.1 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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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. Thank you for reading.