To the annoyance of some shareholders, Sun Cheong Creative Development Holdings (HKG:1781) shares are down a considerable 59% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 34% drop over twelve months.
All else being equal, a share price drop should make a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Does Sun Cheong Creative Development Holdings Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 8.69 that sentiment around Sun Cheong Creative Development Holdings isn’t particularly high. If you look at the image below, you can see Sun Cheong Creative Development Holdings has a lower P/E than the average (12.8) in the packaging industry classification.
Sun Cheong Creative Development Holdings’s P/E tells us that market participants think it will not fare as well as its peers in the same industry.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Sun Cheong Creative Development Holdings had pretty flat EPS growth in the last year. If the company can grow EPS strongly, the market may improve its opinion of it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
Remember: P/E Ratios Don’t Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn’t take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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.
Sun Cheong Creative Development Holdings’s Balance Sheet
Net debt totals 12% of Sun Cheong Creative Development Holdings’s market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Bottom Line On Sun Cheong Creative Development Holdings’s P/E Ratio
Sun Cheong Creative Development Holdings trades on a P/E ratio of 8.7, which is below the HK market average of 10.3. The company does have a little debt, and EPS is moving in the right direction. The P/E ratio implies the market is cautious about longer term prospects. What can be absolutely certain is that the market has become more pessimistic about Sun Cheong Creative Development Holdings over the last month, with the P/E ratio falling from 21.2 back then to 8.7 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: Sun Cheong Creative Development 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).
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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. Thank you for reading.