It's really great to see that even after a strong run, Ever Sunshine Lifestyle Services Group (HKG:1995) shares have been powering on, with a gain of 45% in the last thirty days. That's tops off a massive gain of 234% in the last year.
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. One way to gauge market expectations of a stock 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.
Does Ever Sunshine Lifestyle Services Group Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 53.60 that there is some investor optimism about Ever Sunshine Lifestyle Services Group. As you can see below, Ever Sunshine Lifestyle Services Group has a much higher P/E than the average company (12.2) in the commercial services industry.
Its relatively high P/E ratio indicates that Ever Sunshine Lifestyle Services Group shareholders think it will perform better than other companies in its industry classification. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, Ever Sunshine Lifestyle Services Group grew EPS like Taylor Swift grew her fan base back in 2010; the 92% gain was both fast and well deserved.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.
So What Does Ever Sunshine Lifestyle Services Group's Balance Sheet Tell Us?
Ever Sunshine Lifestyle Services Group has net cash of CN¥1.1b. This is fairly high at 12% 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 Ever Sunshine Lifestyle Services Group's P/E Ratio
With a P/E ratio of 53.6, Ever Sunshine Lifestyle Services Group is expected to grow earnings very strongly in the years to come. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Ever Sunshine Lifestyle Services Group to have a high P/E ratio. What we know for sure is that investors have become much more excited about Ever Sunshine Lifestyle Services Group recently, since they have pushed its P/E ratio from 37.0 to 53.6 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.
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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Ever Sunshine Lifestyle Services Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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