The Hainan Meilan International Airport (HKG:357) share price has done well in the last month, posting a gain of 30%. But that gain wasn't enough to make shareholders whole, as the share price is still down 2.7% 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
How Does Hainan Meilan International Airport's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 5.19 that sentiment around Hainan Meilan International Airport isn't particularly high. We can see in the image below that the average P/E (8.5) for companies in the infrastructure industry is higher than Hainan Meilan International Airport's P/E.
This suggests that market participants think Hainan Meilan International Airport will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Hainan Meilan International Airport shrunk earnings per share by 3.3% last year. But it has grown its earnings per share by 10% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. 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 Hainan Meilan International Airport's P/E?
Net debt is 50% of Hainan Meilan International Airport's market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Verdict On Hainan Meilan International Airport's P/E Ratio
Hainan Meilan International Airport has a P/E of 5.2. That's below the average in the HK market, which is 10.6. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. What we know for sure is that investors are becoming less uncomfortable about Hainan Meilan International Airport's prospects, since they have pushed its P/E ratio from 4.0 to 5.2 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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: Hainan Meilan International Airport 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).
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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