What Is Asahi Songwon Colors's (NSE:ASAHISONG) P/E Ratio After Its Share Price Rocketed?

Those holding Asahi Songwon Colors (NSE:ASAHISONG) shares must be pleased that the share price has rebounded 34% in the last thirty days. But unfortunately, the stock is still down by 36% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 36% 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. 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). 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.

View our latest analysis for Asahi Songwon Colors

Does Asahi Songwon Colors Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 5.88 that sentiment around Asahi Songwon Colors isn't particularly high. We can see in the image below that the average P/E (9.1) for companies in the chemicals industry is higher than Asahi Songwon Colors's P/E.

This suggests that market participants think Asahi Songwon Colors will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. 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.

Asahi Songwon Colors increased earnings per share by a whopping 32% last year. And its annual EPS growth rate over 5 years is 5.7%. So we'd generally expect it to have a relatively high P/E ratio. But earnings per share are down 2.6% per year over the last three years.

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

Don't forget that the P/E ratio considers market capitalization. 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.

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).

So What Does Asahi Songwon Colors's Balance Sheet Tell Us?

Net debt is 34% of Asahi Songwon Colors's market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On Asahi Songwon Colors's P/E Ratio

Asahi Songwon Colors has a P/E of 5.9. That's below the average in the IN market, which is 10.2. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What is very clear is that the market has become less pessimistic about Asahi Songwon Colors over the last month, with the P/E ratio rising from 4.4 back then to 5.9 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.