Those holding REM Group (Holdings) (HKG:1750) shares must be pleased that the share price has rebounded 37% in the last thirty days. But unfortunately, the stock is still down by 14% over a quarter. However, that doesn’t change the fact that longer term shareholders might have been mercilessly wrecked by the 64% share price decline throughout the year.
Assuming no other changes, a sharply higher share price makes a stock less 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 deep value investors might steer clear when expectations of a company are too high. 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.
Does REM Group (Holdings) Have A Relatively High Or Low P/E For Its Industry?
REM Group (Holdings)’s P/E of 14.61 indicates some degree of optimism towards the stock. As you can see below, REM Group (Holdings) has a higher P/E than the average company (8.9) in the electrical industry.
That means that the market expects REM Group (Holdings) will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
REM Group (Holdings) increased earnings per share by 4.8% last year. Unfortunately, earnings per share are down 18% a year, over 5 years.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.
So What Does REM Group (Holdings)’s Balance Sheet Tell Us?
With net cash of HK$78m, REM Group (Holdings) has a very strong balance sheet, which may be important for its business. Having said that, at 47% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On REM Group (Holdings)’s P/E Ratio
REM Group (Holdings) has a P/E of 14.6. That’s higher than the average in its market, which is 9.5. Recent earnings growth wasn’t bad. Also positive, the relatively strong balance sheet will allow for investment in growth — and the P/E indicates shareholders that will happen! What is very clear is that the market has become more optimistic about REM Group (Holdings) over the last month, with the P/E ratio rising from 10.7 back then to 14.6 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is ‘blood in the streets’, then you may feel the opportunity has passed.
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. Although we don’t have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
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 email@example.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.
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