Nanjing Sample Technology (HKG:1708) shares have had a really impressive month, gaining 31%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 28% 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.
How Does Nanjing Sample Technology's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 25.90 that there is some investor optimism about Nanjing Sample Technology. The image below shows that Nanjing Sample Technology has a higher P/E than the average (9.6) P/E for companies in the electronic industry.
Its relatively high P/E ratio indicates that Nanjing Sample Technology shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Nanjing Sample Technology's earnings per share fell by 17% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 1.6%.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Nanjing Sample Technology's Balance Sheet
Nanjing Sample Technology's net debt is 13% of its 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 Nanjing Sample Technology's P/E Ratio
Nanjing Sample Technology has a P/E of 25.9. That's higher than the average in its market, which is 10.5. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years. What we know for sure is that investors have become much more excited about Nanjing Sample Technology recently, since they have pushed its P/E ratio from 19.8 to 25.9 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', 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 better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than Nanjing Sample 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).
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