Zhaojin Mining Industry (HKG:1818) shares have continued recent momentum with a 32% gain in the last month alone. Looking back a bit further, we’re also happy to report the stock is up 80% in the last year.
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. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Does Zhaojin Mining Industry Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 68.9 that there is some investor optimism about Zhaojin Mining Industry. As you can see below, Zhaojin Mining Industry has a much higher P/E than the average company (9) in the metals and mining industry.
That means that the market expects Zhaojin Mining Industry will outperform other companies in its industry.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Zhaojin Mining Industry’s earnings per share fell by 28% in the last twelve months. But over the longer term (3 years), earnings per share have increased by 12%. And it has shrunk its earnings per share by 9.9% per year over the last five years. This could justify a pessimistic P/E.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
So What Does Zhaojin Mining Industry’s Balance Sheet Tell Us?
Zhaojin Mining Industry has net debt equal to 43% of its market cap. You’d want to be aware of this fact, but it doesn’t bother us.
The Bottom Line On Zhaojin Mining Industry’s P/E Ratio
Zhaojin Mining Industry’s P/E is 68.9 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. With a bit of debt, but a lack of recent growth, it’s safe to say the market is expecting improved profit performance from the company, in the next few years. What is very clear is that the market has become significantly more optimistic about Zhaojin Mining Industry over the last month, with the P/E ratio rising from 52.1 back then to 68.9 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.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
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.
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 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.