How Does EFT Solutions Holdings's (HKG:8062) P/E Compare To Its Industry, After Its Big Share Price Gain?

EFT Solutions Holdings (HKG:8062) shareholders are no doubt pleased to see that the share price has had a great month, posting a 37% gain, recovering from prior weakness. But shareholders may not all be feeling jubilant, since the share price is still down 20% in the last year.

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

See our latest analysis for EFT Solutions Holdings

How Does EFT Solutions Holdings's P/E Ratio Compare To Its Peers?

EFT Solutions Holdings's P/E of 21.70 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (9.3) for companies in the electronic industry is lower than EFT Solutions Holdings's P/E.

Its relatively high P/E ratio indicates that EFT Solutions Holdings 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 further research is always essential. I often monitor director buying and 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. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

EFT Solutions Holdings's earnings per share fell by 57% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 19% annually. This might lead to muted expectations.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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.

How Does EFT Solutions Holdings's Debt Impact Its P/E Ratio?

EFT Solutions Holdings has net cash of HK$35m. This is fairly high at 39% 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 EFT Solutions Holdings's P/E Ratio

EFT Solutions Holdings's P/E is 21.7 which is above average (9.6) in its market. The recent drop in earnings per share might keep value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will. What is very clear is that the market has become significantly more optimistic about EFT Solutions Holdings over the last month, with the P/E ratio rising from 15.8 back then to 21.7 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 should be looking to buy stocks that the market is wrong about. 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 EFT Solutions Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.