It's really great to see that even after a strong run, Ever Sunshine Lifestyle Services Group (HKG:1995) shares have been powering on, with a gain of 31% in the last thirty days. That's tops off a massive gain of 154% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). 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.
Does Ever Sunshine Lifestyle Services Group Have A Relatively High Or Low P/E For Its Industry?
Ever Sunshine Lifestyle Services Group's P/E of 63.26 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (12.0) for companies in the commercial services industry is a lot lower than Ever Sunshine Lifestyle Services Group's P/E.
That means that the market expects Ever Sunshine Lifestyle Services Group 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
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Ever Sunshine Lifestyle Services Group's earnings made like a rocket, taking off 92% last year.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting Ever Sunshine Lifestyle Services Group's P/E?
With net cash of CN¥1.1b, Ever Sunshine Lifestyle Services Group has a very strong balance sheet, which may be important for its business. Having said that, at 10% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Ever Sunshine Lifestyle Services Group's P/E Ratio
Ever Sunshine Lifestyle Services Group's P/E is 63.3 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. Its net cash position is the cherry on top of its superb 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 we know for sure is that investors have become much more excited about Ever Sunshine Lifestyle Services Group recently, since they have pushed its P/E ratio from 48.3 to 63.3 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.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Ever Sunshine Lifestyle Services Group 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).
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