Unfortunately for some shareholders, the Glory Mark Hi-Tech (Holdings) (HKG:8159) share price has dived 34% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 42% drop over twelve months.
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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
How Does Glory Mark Hi-Tech (Holdings)'s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 10.40 that there is some investor optimism about Glory Mark Hi-Tech (Holdings). The image below shows that Glory Mark Hi-Tech (Holdings) has a higher P/E than the average (9.2) P/E for companies in the electronic industry.
Glory Mark Hi-Tech (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 delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Glory Mark Hi-Tech (Holdings) shrunk earnings per share by 52% over the last year. But it has grown its earnings per share by 23% per year over the last five years.
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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does Glory Mark Hi-Tech (Holdings)'s Debt Impact Its P/E Ratio?
Glory Mark Hi-Tech (Holdings) has net cash of HK$63m. This is fairly high at 49% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Verdict On Glory Mark Hi-Tech (Holdings)'s P/E Ratio
Glory Mark Hi-Tech (Holdings) has a P/E of 10.4. That's around the same as the average in the HK market, which is 10.1. While the absence of growth in the last year is probably causing a degree of pessimism, the healthy balance sheet means the company retains potential for future growth. So it's not surprising to see it trade on a P/E roughly in line with the market. Given Glory Mark Hi-Tech (Holdings)'s P/E ratio has declined from 15.7 to 10.4 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 don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
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 shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Glory Mark Hi-Tech (Holdings). So you may wish to see this free collection of other companies that have grown earnings strongly.
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