U.S. markets close in 5 hours 2 minutes

A Sliding Share Price Has Us Looking At China Overseas Grand Oceans Group Limited's (HKG:81) P/E Ratio

Simply Wall St

To the annoyance of some shareholders, China Overseas Grand Oceans Group (HKG:81) shares are down a considerable 32% in the last month. Even longer term holders have taken a real hit with the stock declining 3.5% in the last year.

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. The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for China Overseas Grand Oceans Group

Does China Overseas Grand Oceans Group Have A Relatively High Or Low P/E For Its Industry?

China Overseas Grand Oceans Group's P/E of 3.60 indicates relatively low sentiment towards the stock. The image below shows that China Overseas Grand Oceans Group has a lower P/E than the average (6.2) P/E for companies in the real estate industry.

SEHK:81 Price Estimation Relative to Market, March 23rd 2020

Its relatively low P/E ratio indicates that China Overseas Grand Oceans Group shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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

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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

China Overseas Grand Oceans Group's earnings made like a rocket, taking off 52% last year. The sweetener is that the annual five year growth rate of 17% is also impressive. So I'd be surprised if the P/E ratio was not above average.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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 China Overseas Grand Oceans Group's Balance Sheet Tell Us?

China Overseas Grand Oceans Group's net debt is 0.1% of its market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Bottom Line On China Overseas Grand Oceans Group's P/E Ratio

China Overseas Grand Oceans Group's P/E is 3.6 which is below average (8.6) in the HK market. The company hasn't stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer. Given China Overseas Grand Oceans Group's P/E ratio has declined from 5.3 to 3.6 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than China Overseas Grand Oceans Group. 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.