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A Sliding Share Price Has Us Looking At Milestone Builder Holdings Limited's (HKG:1667) P/E Ratio

Simply Wall St

To the annoyance of some shareholders, Milestone Builder Holdings (HKG:1667) shares are down a considerable 32% in the last month. Given the 62% drop over the last year, some shareholders might be worried that they have become bagholders. For those wondering, a bagholder is someone who keeps holding a losing stock indefinitely, without taking the time to consider its prospects carefully, going forward.

Assuming nothing else has changed, a lower share price makes a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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 Milestone Builder Holdings

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

We can tell from its P/E ratio of 15.18 that there is some investor optimism about Milestone Builder Holdings. The image below shows that Milestone Builder Holdings has a higher P/E than the average (7.5) P/E for companies in the construction industry.

SEHK:1667 Price Estimation Relative to Market, March 17th 2020

Milestone Builder Holdings'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

If earnings fall then in the future the 'E' will be lower. 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.

Milestone Builder Holdings's earnings per share fell by 58% in the last twelve months. And over the longer term (3 years) earnings per share have decreased 45% annually. This could justify a low P/E.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

Is Debt Impacting Milestone Builder Holdings's P/E?

Milestone Builder Holdings has net debt worth a very significant 106% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Bottom Line On Milestone Builder Holdings's P/E Ratio

Milestone Builder Holdings has a P/E of 15.2. That's higher than the average in its market, which is 8.9. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future. Given Milestone Builder Holdings's P/E ratio has declined from 22.5 to 15.2 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Milestone Builder Holdings. 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 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.