The Shirble Department Store Holdings (China) (HKG:312) share price has done well in the last month, posting a gain of 30%. And the full year gain of 34% isn't too shabby, either!
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. 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.
How Does Shirble Department Store Holdings (China)'s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 33.20 that there is some investor optimism about Shirble Department Store Holdings (China). You can see in the image below that the average P/E (10.4) for companies in the multiline retail industry is a lot lower than Shirble Department Store Holdings (China)'s P/E.
Shirble Department Store Holdings (China)'s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. 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.
Shirble Department Store Holdings (China)'s 469% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. Even better, EPS is up 21% per year over three years. So we'd absolutely expect it to have a relatively high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
So What Does Shirble Department Store Holdings (China)'s Balance Sheet Tell Us?
Since Shirble Department Store Holdings (China) holds net cash of CN¥310m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Shirble Department Store Holdings (China)'s P/E Ratio
Shirble Department Store Holdings (China) trades on a P/E ratio of 33.2, which is multiples above its market average of 10.7. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). What is very clear is that the market has become significantly more optimistic about Shirble Department Store Holdings (China) over the last month, with the P/E ratio rising from 25.5 back then to 33.2 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. 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. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Shirble Department Store Holdings (China). So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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.