What Is Wai Hung Group Holdings's (HKG:3321) P/E Ratio After Its Share Price Rocketed?

Wai Hung Group Holdings (HKG:3321) shares have continued recent momentum with a 31% gain in the last month alone. And the full year gain of 50% isn't too shabby, either!

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. 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.

Check out our latest analysis for Wai Hung Group Holdings

Does Wai Hung Group Holdings Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 22.19 that there is some investor optimism about Wai Hung Group Holdings. As you can see below, Wai Hung Group Holdings has a higher P/E than the average company (12.2) in the commercial services industry.

Wai Hung Group Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Wai Hung Group Holdings's earnings per share fell by 6.2% in the last twelve months. But it has grown its earnings per share by 10% per year over the last five years.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Wai Hung Group Holdings's Balance Sheet

The extra options and safety that comes with Wai Hung Group Holdings's MO$19m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Wai Hung Group Holdings's P/E Ratio

Wai Hung Group Holdings has a P/E of 22.2. That's higher than the average in its market, which is 9.6. The recent drop in earnings per share would make some investors cautious, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will. What we know for sure is that investors have become much more excited about Wai Hung Group Holdings recently, since they have pushed its P/E ratio from 16.9 to 22.2 over the last month. 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. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Wai Hung Group Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.