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A Rising Share Price Has Us Looking Closely At Binjiang Services Group Co. Ltd.'s (HKG:3316) P/E Ratio

Simply Wall St

It's really great to see that even after a strong run, Binjiang Services Group (HKG:3316) shares have been powering on, with a gain of 40% 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.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). 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.

View our latest analysis for Binjiang Services Group

How Does Binjiang Services Group's P/E Ratio Compare To Its Peers?

Binjiang Services Group's P/E of 32.50 indicates some degree of optimism towards the stock. The image below shows that Binjiang Services Group has a higher P/E than the average (11.9) P/E for companies in the commercial services industry.

SEHK:3316 Price Estimation Relative to Market, February 18th 2020

Its relatively high P/E ratio indicates that Binjiang Services Group shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Binjiang Services Group increased earnings per share by an impressive 18% over the last twelve months. And it has bolstered its earnings per share by 46% per year over the last five years. This could arguably justify a relatively high P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. 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 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.

Binjiang Services Group's Balance Sheet

Binjiang Services Group has net cash of CN¥834m. This is fairly high at 27% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Verdict On Binjiang Services Group's P/E Ratio

Binjiang Services Group trades on a P/E ratio of 32.5, which is multiples above its market average of 10.1. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. So it does not seem strange that the P/E is above average. What we know for sure is that investors have become much more excited about Binjiang Services Group recently, since they have pushed its P/E ratio from 23.2 to 32.5 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.

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. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

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.

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.

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. Thank you for reading.