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It’s great to see Ever Sunshine Lifestyle Services Group (HKG:1995) shareholders have their patience rewarded with a 31% share price pop in the last month. Longer term shareholders are no doubt thankful for the recovery in the share price, since it’s pretty much flat for the year, even after the recent pop.
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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
How Does Ever Sunshine Lifestyle Services Group’s P/E Ratio Compare To Its Peers?
Ever Sunshine Lifestyle Services Group’s P/E of 43.46 indicates some degree of optimism towards the stock. As you can see below, Ever Sunshine Lifestyle Services Group has a much higher P/E than the average company (13.4) in the commercial services industry.
That means that the market expects Ever Sunshine Lifestyle Services Group 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. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
It’s nice to see that Ever Sunshine Lifestyle Services Group grew EPS by a stonking 30% in the last year.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. 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.
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.
Is Debt Impacting Ever Sunshine Lifestyle Services Group’s P/E?
Ever Sunshine Lifestyle Services Group has net cash of CN¥1.2b. This is fairly high at 20% 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 Ever Sunshine Lifestyle Services Group’s P/E Ratio
Ever Sunshine Lifestyle Services Group’s P/E is 43.5 which is way above average (10.8) in its market. With cash in the bank the company has plenty of growth options — and it is already on the right track. So it does not seem strange that the P/E is above average. What is very clear is that the market has become significantly more optimistic about Ever Sunshine Lifestyle Services Group over the last month, with the P/E ratio rising from 33.1 back then to 43.5 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 should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Ever Sunshine Lifestyle Services Group 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).
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 firstname.lastname@example.org. 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.