What Is China Wan Tong Yuan (Holdings)'s (HKG:6966) P/E Ratio After Its Share Price Rocketed?

It's really great to see that even after a strong run, China Wan Tong Yuan (Holdings) (HKG:6966) shares have been powering on, with a gain of 31% in the last thirty days. That's tops off a massive gain of 167% 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). 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

View our latest analysis for China Wan Tong Yuan (Holdings)

Does China Wan Tong Yuan (Holdings) Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 24.29 that there is some investor optimism about China Wan Tong Yuan (Holdings). You can see in the image below that the average P/E (12.2) for companies in the consumer services industry is lower than China Wan Tong Yuan (Holdings)'s P/E.

Its relatively high P/E ratio indicates that China Wan Tong Yuan (Holdings) shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

China Wan Tong Yuan (Holdings)'s earnings per share fell by 15% in the last twelve months. But EPS is up 3.6% over the last 3 years.

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. 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).

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.

How Does China Wan Tong Yuan (Holdings)'s Debt Impact Its P/E Ratio?

With net cash of CN¥189m, China Wan Tong Yuan (Holdings) has a very strong balance sheet, which may be important for its business. Having said that, at 32% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On China Wan Tong Yuan (Holdings)'s P/E Ratio

China Wan Tong Yuan (Holdings)'s P/E is 24.3 which is above average (8.5) in its market. Falling earnings per share is probably keeping traditional value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will. What is very clear is that the market has become significantly more optimistic about China Wan Tong Yuan (Holdings) over the last month, with the P/E ratio rising from 18.6 back then to 24.3 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. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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: China Wan Tong Yuan (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.