Unfortunately for some shareholders, the Zhejiang Tengy Environmental Technology (HKG:1527) share price has dived 38% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 45% in that time.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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, 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). 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 Zhejiang Tengy Environmental Technology Have A Relatively High Or Low P/E For Its Industry?
Zhejiang Tengy Environmental Technology has a P/E ratio of 9.64. You can see in the image below that the average P/E (10.3) for companies in the machinery industry is roughly the same as Zhejiang Tengy Environmental Technology's P/E.
That indicates that the market expects Zhejiang Tengy Environmental Technology will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Zhejiang Tengy Environmental Technology shrunk earnings per share by 68% over the last year. And EPS is down 4.9% a year, over the last 5 years. This might lead to muted expectations.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
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.
Zhejiang Tengy Environmental Technology's Balance Sheet
Zhejiang Tengy Environmental Technology's net debt equates to 35% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Zhejiang Tengy Environmental Technology's P/E Ratio
Zhejiang Tengy Environmental Technology has a P/E of 9.6. That's around the same as the average in the HK market, which is 10.2. When you consider the lack of EPS growth last year (along with some debt), it seems the market is optimistic about the future for the business. Given Zhejiang Tengy Environmental Technology's P/E ratio has declined from 15.6 to 9.6 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 the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. Although we don't have analyst forecasts 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 Zhejiang Tengy Environmental Technology. 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 email@example.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.
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