Mi Ming Mart Holdings (HKG:8473) shares have had a really impressive month, gaining 32%, after some slippage. That brought the twelve month gain to a very sharp 61%.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. 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 Mi Ming Mart Holdings's P/E Ratio Compare To Its Peers?
Mi Ming Mart Holdings's P/E is 11.58. You can see in the image below that the average P/E (11.7) for companies in the specialty retail industry is roughly the same as Mi Ming Mart Holdings's P/E.
That indicates that the market expects Mi Ming Mart Holdings will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Mi Ming Mart Holdings's earnings made like a rocket, taking off 201% last year.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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 Mi Ming Mart Holdings's P/E?
With net cash of HK$98m, Mi Ming Mart Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 41% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Mi Ming Mart Holdings's P/E Ratio
Mi Ming Mart Holdings's P/E is 11.6 which is above average (10.3) 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 Mi Ming Mart Holdings to have a high P/E ratio. What is very clear is that the market has become more optimistic about Mi Ming Mart Holdings over the last month, with the P/E ratio rising from 8.8 back then to 11.6 today. 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 should be looking to buy stocks that the market is wrong about. 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.
But note: Mi Ming Mart Holdings 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).
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 firstname.lastname@example.org. 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.