It's really great to see that even after a strong run, Forward Fashion (International) Holdings (HKG:2528) shares have been powering on, with a gain of 34% in the last thirty days. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.
Does Forward Fashion (International) Holdings Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 11.14 that there is some investor optimism about Forward Fashion (International) Holdings. You can see in the image below that the average P/E (9.3) for companies in the specialty retail industry is lower than Forward Fashion (International) Holdings's P/E.
That means that the market expects Forward Fashion (International) Holdings will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Forward Fashion (International) Holdings saw earnings per share decrease by 64% last year.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 Forward Fashion (International) Holdings's Balance Sheet Tell Us?
Forward Fashion (International) Holdings has net debt equal to 48% of its market cap. While it's worth keeping this in mind, it isn't a worry.
The Verdict On Forward Fashion (International) Holdings's P/E Ratio
Forward Fashion (International) Holdings's P/E is 11.1 which is above average (9.6) in its market. With some debt but no EPS growth last year, the market has high expectations of future profits. What we know for sure is that investors have become more excited about Forward Fashion (International) Holdings recently, since they have pushed its P/E ratio from 8.3 to 11.1 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 have an opportunity when market expectations about a stock are wrong. 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. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Forward Fashion (International) Holdings. 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 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.
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