A Rising Share Price Has Us Looking Closely At Country Garden Services Holdings Company Limited’s (HKG:6098) P/E Ratio

It’s really great to see that even after a strong run, Country Garden Services Holdings (HKG:6098) shares have been powering on, with a gain of 32% in the last thirty days. That brought the twelve month gain to a very sharp 65%.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

See our latest analysis for Country Garden Services Holdings

Does Country Garden Services Holdings Have A Relatively High Or Low P/E For Its Industry?

Country Garden Services Holdings’s P/E of 42.78 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (13.4) for companies in the commercial services industry is a lot lower than Country Garden Services Holdings’s P/E.

SEHK:6098 Price Estimation Relative to Market, September 4th 2019
SEHK:6098 Price Estimation Relative to Market, September 4th 2019

Its relatively high P/E ratio indicates that Country Garden Services Holdings shareholders think it will perform better than other companies in its industry classification.

How Growth Rates Impact P/E Ratios

When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.

Country Garden Services Holdings’s earnings made like a rocket, taking off 84% last year. Regrettably, the longer term performance is poor, with EPS down 35% per year over 5 years.

Remember: P/E Ratios Don’t Consider The Balance Sheet

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won’t reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Country Garden Services Holdings’s Balance Sheet

With net cash of CN¥6.2b, Country Garden Services Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 11% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Country Garden Services Holdings’s P/E Ratio

Country Garden Services Holdings’s P/E is 42.8 which is way above average (10.4) in its market. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). What is very clear is that the market has become significantly more optimistic about Country Garden Services Holdings over the last month, with the P/E ratio rising from 32.5 back then to 42.8 today. For those who prefer to invest with the flow of momentum, that might mean it’s time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors have an opportunity when market expectations about a stock are wrong. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Country Garden Services Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.

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. Thank you for reading.