U.S. Markets closed

A Rising Share Price Has Us Looking Closely At Huscoke Holdings Limited's (HKG:704) P/E Ratio

Simply Wall St

Those holding Huscoke Holdings (HKG:704) shares must be pleased that the share price has rebounded 38% in the last thirty days. But unfortunately, the stock is still down by 22% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 47% 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Huscoke Holdings

Does Huscoke Holdings Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 2.56 that sentiment around Huscoke Holdings isn't particularly high. If you look at the image below, you can see Huscoke Holdings has a lower P/E than the average (6.7) in the oil and gas industry classification.

SEHK:704 Price Estimation Relative to Market, January 10th 2020

Its relatively low P/E ratio indicates that Huscoke Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Huscoke Holdings, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

In the last year, Huscoke Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 396% gain was both fast and well deserved.

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

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

So What Does Huscoke Holdings's Balance Sheet Tell Us?

Huscoke Holdings has net debt worth just 8.0% of its market capitalization. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Bottom Line On Huscoke Holdings's P/E Ratio

Huscoke Holdings trades on a P/E ratio of 2.6, which is below the HK market average of 10.6. The company does have a little debt, and EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What is very clear is that the market has become less pessimistic about Huscoke Holdings over the last month, with the P/E ratio rising from 1.9 back then to 2.6 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. 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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Huscoke Holdings. 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 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.