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A Rising Share Price Has Us Looking Closely At Kaisa Prosperity Holdings Limited's (HKG:2168) P/E Ratio

Simply Wall St

Kaisa Prosperity Holdings (HKG:2168) shares have continued recent momentum with a 35% gain in the last month alone. 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. 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. 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.

See our latest analysis for Kaisa Prosperity Holdings

How Does Kaisa Prosperity Holdings's P/E Ratio Compare To Its Peers?

Kaisa Prosperity Holdings's P/E of 18.19 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (6.6) for companies in the real estate industry is lower than Kaisa Prosperity Holdings's P/E.

SEHK:2168 Price Estimation Relative to Market, November 6th 2019

Kaisa Prosperity Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. 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.

Kaisa Prosperity Holdings's 100% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. 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 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.

Is Debt Impacting Kaisa Prosperity Holdings's P/E?

With net cash of CN¥519m, Kaisa Prosperity Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 22% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Kaisa Prosperity Holdings's P/E Ratio

Kaisa Prosperity Holdings's P/E is 18.2 which is above average (10.4) in its market. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Kaisa Prosperity Holdings to have a high P/E ratio. What we know for sure is that investors have become more excited about Kaisa Prosperity Holdings recently, since they have pushed its P/E ratio from 13.4 to 18.2 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.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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 editorial-team@simplywallst.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.