Sichuan Energy Investment Development (HKG:1713) shares have continued recent momentum with a 33% gain in the last month alone. The full year gain of 31% is pretty reasonable, too.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
Does Sichuan Energy Investment Development Have A Relatively High Or Low P/E For Its Industry?
Sichuan Energy Investment Development's P/E of 11.76 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Sichuan Energy Investment Development has a lower P/E than the average (14.8) in the electric utilities industry classification.
Its relatively low P/E ratio indicates that Sichuan Energy Investment Development shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Sichuan Energy Investment Development, 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
Earnings growth rates have a big influence on P/E ratios. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Sichuan Energy Investment Development shrunk earnings per share by 3.8% last year. But over the longer term (5 years) earnings per share have increased by 8.7%.
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. 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.
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 Sichuan Energy Investment Development's Debt Impact Its P/E Ratio?
The extra options and safety that comes with Sichuan Energy Investment Development's CN¥104m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Sichuan Energy Investment Development's P/E Ratio
Sichuan Energy Investment Development's P/E is 11.8 which is above average (10.2) in its market. The recent drop in earnings per share might keep value investors away, but the healthy balance sheet means the company retains potential for future growth. If fails to eventuate, the current high P/E could prove to be temporary, as the share price falls. What is very clear is that the market has become more optimistic about Sichuan Energy Investment Development over the last month, with the P/E ratio rising from 8.8 back then to 11.8 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. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
But note: Sichuan Energy Investment Development 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 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.