A Sliding Share Price Has Us Looking At Sunny Optical Technology (Group) Company Limited's (HKG:2382) P/E Ratio
To the annoyance of some shareholders, Sunny Optical Technology (Group) (HKG:2382) shares are down a considerable 31% in the last month. Even longer term holders have taken a real hit with the stock declining 3.3% 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. Perhaps the simplest way to get a read on investors' expectations of a business 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.
View our latest analysis for Sunny Optical Technology (Group)
Does Sunny Optical Technology (Group) Have A Relatively High Or Low P/E For Its Industry?
Sunny Optical Technology (Group)'s P/E of 22.86 indicates some degree of optimism towards the stock. As you can see below, Sunny Optical Technology (Group) has a higher P/E than the average company (7.8) in the electronic industry.
That means that the market expects Sunny Optical Technology (Group) will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Sunny Optical Technology (Group)'s 60% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The sweetener is that the annual five year growth rate of 47% 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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does Sunny Optical Technology (Group)'s Balance Sheet Tell Us?
Sunny Optical Technology (Group) has net cash of CN¥2.4b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Sunny Optical Technology (Group)'s P/E Ratio
Sunny Optical Technology (Group) trades on a P/E ratio of 22.9, which is above its market average of 8.8. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Sunny Optical Technology (Group) to have a high P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about Sunny Optical Technology (Group) over the last month, with the P/E ratio falling from 33.2 back then to 22.9 today. 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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Sunny Optical Technology (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.
