U.S. Markets closed

A Rising Share Price Has Us Looking Closely At Shandong Weigao Group Medical Polymer Company Limited's (HKG:1066) P/E Ratio

Simply Wall St

Shandong Weigao Group Medical Polymer (HKG:1066) shares have had a really impressive month, gaining 32%, after some slippage. That brought the twelve month gain to a very sharp 59%.

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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Shandong Weigao Group Medical Polymer

Does Shandong Weigao Group Medical Polymer Have A Relatively High Or Low P/E For Its Industry?

Shandong Weigao Group Medical Polymer's P/E of 27.18 indicates relatively low sentiment towards the stock. The image below shows that Shandong Weigao Group Medical Polymer has a lower P/E than the average (43.2) P/E for companies in the medical equipment industry.

SEHK:1066 Price Estimation Relative to Market April 27th 2020

This suggests that market participants think Shandong Weigao Group Medical Polymer will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

It's nice to see that Shandong Weigao Group Medical Polymer grew EPS by a stonking 25% in the last year. And its annual EPS growth rate over 5 years is 11%. With that performance, I would expect it to have an above average P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

How Does Shandong Weigao Group Medical Polymer's Debt Impact Its P/E Ratio?

Shandong Weigao Group Medical Polymer's net debt is 1.6% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Bottom Line On Shandong Weigao Group Medical Polymer's P/E Ratio

Shandong Weigao Group Medical Polymer trades on a P/E ratio of 27.2, which is above its market average of 9.3. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. Therefore, it's not particularly surprising that it has a above average P/E ratio. What is very clear is that the market has become significantly more optimistic about Shandong Weigao Group Medical Polymer over the last month, with the P/E ratio rising from 20.6 back then to 27.2 today. 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.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Shandong Weigao Group Medical Polymer 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 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.