A Sliding Share Price Has Us Looking At Sichuan Languang Justbon Services Group Co., Ltd.'s (HKG:2606) P/E Ratio
Unfortunately for some shareholders, the Sichuan Languang Justbon Services Group (HKG:2606) share price has dived 46% in the last thirty days. Zooming out, the recent drop wiped out a year's worth of gains, with the share price now back where it was a year ago.
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). 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 Sichuan Languang Justbon Services Group
How Does Sichuan Languang Justbon Services Group's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 8.58 that there is some investor optimism about Sichuan Languang Justbon Services Group. As you can see below, Sichuan Languang Justbon Services Group has a higher P/E than the average company (6.2) in the real estate industry.
Its relatively high P/E ratio indicates that Sichuan Languang Justbon Services Group shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
In the last year, Sichuan Languang Justbon Services Group grew EPS like Taylor Swift grew her fan base back in 2010; the 60% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 29% per year. So I'd be surprised if the P/E ratio was not above average.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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.
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 Sichuan Languang Justbon Services Group's P/E?
Since Sichuan Languang Justbon Services Group holds net cash of CN¥189m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Sichuan Languang Justbon Services Group's P/E Ratio
Sichuan Languang Justbon Services Group's P/E is 8.6 which is about average (8.6) in the HK market. Its net cash position is the cherry on top of its superb EPS growth. So at a glance we're a bit surprised that Sichuan Languang Justbon Services Group does not have a higher P/E ratio. All the more so, since analysts expect further profit growth. Click here to research this potential opportunity.. What can be absolutely certain is that the market has become more pessimistic about Sichuan Languang Justbon Services Group over the last month, with the P/E ratio falling from 16.0 back then to 8.6 today. 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 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. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
