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A Rising Share Price Has Us Looking Closely At Yangzhou Guangling District Taihe Rural Micro-finance Company Limited's (HKG:1915) P/E Ratio

Simply Wall St

Yangzhou Guangling District Taihe Rural Micro-finance (HKG:1915) shares have continued recent momentum with a 31% gain in the last month alone. That brought the twelve month gain to a very sharp 79%.

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 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.

Check out our latest analysis for Yangzhou Guangling District Taihe Rural Micro-finance

Does Yangzhou Guangling District Taihe Rural Micro-finance Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 31.80 that there is some investor optimism about Yangzhou Guangling District Taihe Rural Micro-finance. As you can see below, Yangzhou Guangling District Taihe Rural Micro-finance has a much higher P/E than the average company (6.7) in the consumer finance industry.

SEHK:1915 Price Estimation Relative to Market, November 27th 2019

Yangzhou Guangling District Taihe Rural Micro-finance'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 delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

Yangzhou Guangling District Taihe Rural Micro-finance increased earnings per share by 3.6% last year. In contrast, EPS has decreased by 6.5%, annually, over 5 years.

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

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

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Yangzhou Guangling District Taihe Rural Micro-finance's Debt Impact Its P/E Ratio?

Since Yangzhou Guangling District Taihe Rural Micro-finance holds net cash of CN¥13m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On Yangzhou Guangling District Taihe Rural Micro-finance's P/E Ratio

Yangzhou Guangling District Taihe Rural Micro-finance has a P/E of 31.8. That's significantly higher than the average in its market, which is 10.3. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth -- and the P/E indicates shareholders that will happen! What is very clear is that the market has become significantly more optimistic about Yangzhou Guangling District Taihe Rural Micro-finance over the last month, with the P/E ratio rising from 24.2 back then to 31.8 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 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 might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: Yangzhou Guangling District Taihe Rural Micro-finance 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.