Zhejiang Tengy Environmental Technology (HKG:1527) shares have had a really impressive month, gaining 64%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 25% 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. 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 Zhejiang Tengy Environmental Technology Have A Relatively High Or Low P/E For Its Industry?
Zhejiang Tengy Environmental Technology's P/E of 16.35 indicates some degree of optimism towards the stock. The image below shows that Zhejiang Tengy Environmental Technology has a higher P/E than the average (10.5) P/E for companies in the machinery industry.
Zhejiang Tengy Environmental Technology's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Zhejiang Tengy Environmental Technology shrunk earnings per share by 68% over the last year. And it has shrunk its earnings per share by 4.9% per year over the last five years. This might lead to muted expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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 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 Zhejiang Tengy Environmental Technology's P/E?
Net debt is 28% of Zhejiang Tengy Environmental Technology's market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On Zhejiang Tengy Environmental Technology's P/E Ratio
Zhejiang Tengy Environmental Technology has a P/E of 16.3. That's higher than the average in its market, which is 10.5. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. What we know for sure is that investors have become much more excited about Zhejiang Tengy Environmental Technology recently, since they have pushed its P/E ratio from 10.0 to 16.3 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. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 Zhejiang Tengy Environmental Technology. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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.