How Does Guangdong Adway Construction (Group) Holdings's (HKG:6189) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the Guangdong Adway Construction (Group) Holdings (HKG:6189) share price has dived 42% in the last thirty days. Given the 63% drop over the last year, some shareholders might be worried that they have become bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.

Assuming nothing else has changed, a lower share price makes a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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 Guangdong Adway Construction (Group) Holdings

Does Guangdong Adway Construction (Group) Holdings Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 4.04 that sentiment around Guangdong Adway Construction (Group) Holdings isn't particularly high. If you look at the image below, you can see Guangdong Adway Construction (Group) Holdings has a lower P/E than the average (9.9) in the construction industry classification.

Guangdong Adway Construction (Group) Holdings's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Guangdong Adway Construction (Group) Holdings, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Guangdong Adway Construction (Group) Holdings's earnings per share grew by -9.5% in the last twelve months. And its annual EPS growth rate over 5 years is 9.3%. In contrast, EPS has decreased by 1.6%, annually, over 3 years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.

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.

Guangdong Adway Construction (Group) Holdings's Balance Sheet

Net debt is 48% of Guangdong Adway Construction (Group) Holdings's market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On Guangdong Adway Construction (Group) Holdings's P/E Ratio

Guangdong Adway Construction (Group) Holdings's P/E is 4.0 which is below average (10.5) in the HK market. EPS grew over the last twelve months, and debt levels are quite reasonable. 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 Guangdong Adway Construction (Group) Holdings over the last month, with the P/E ratio falling from 7.0 back then to 4.0 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. 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. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Guangdong Adway Construction (Group) 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).

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.

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. Thank you for reading.