How Does Nexion Technologies's (HKG:8420) P/E Compare To Its Industry, After Its Big Share Price Gain?

Nexion Technologies (HKG:8420) shares have continued recent momentum with a 51% gain in the last month alone. But shareholders may not all be feeling jubilant, since the share price is still down 19% 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Nexion Technologies

How Does Nexion Technologies's P/E Ratio Compare To Its Peers?

Nexion Technologies's P/E of 16.72 indicates some degree of optimism towards the stock. As you can see below, Nexion Technologies has a higher P/E than the average company (11.8) in the it industry.

That means that the market expects Nexion Technologies will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Nexion Technologies saw earnings per share decrease by 69% last year. And it has shrunk its earnings per share by 30% per year over the last three years. This growth rate might warrant a low P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Is Debt Impacting Nexion Technologies's P/E?

With net cash of US$5.9m, Nexion Technologies has a very strong balance sheet, which may be important for its business. Having said that, at 54% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Nexion Technologies's P/E Ratio

Nexion Technologies's P/E is 16.7 which is above average (10.5) in its market. 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 Nexion Technologies recently, since they have pushed its P/E ratio from 11.1 to 16.7 over the last month. 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.

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. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: Nexion Technologies 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.