How Does Visdynamics Holdings Berhad's (KLSE:VIS) P/E Compare To Its Industry, After Its Big Share Price Gain?

Visdynamics Holdings Berhad (KLSE:VIS) shares have had a really impressive month, gaining 43%, after some slippage. However, the annual gain of 7.1% wasn't so impressive.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

Check out our latest analysis for Visdynamics Holdings Berhad

How Does Visdynamics Holdings Berhad's P/E Ratio Compare To Its Peers?

Visdynamics Holdings Berhad's P/E of 17.67 indicates relatively low sentiment towards the stock. The image below shows that Visdynamics Holdings Berhad has a lower P/E than the average (31.1) P/E for companies in the semiconductor industry.

Its relatively low P/E ratio indicates that Visdynamics Holdings Berhad shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Visdynamics Holdings Berhad, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

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. Then, a lower P/E should attract more buyers, pushing the share price up.

Visdynamics Holdings Berhad saw earnings per share decrease by 39% last year. But EPS is up 30% over the last 5 years.

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

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

So What Does Visdynamics Holdings Berhad's Balance Sheet Tell Us?

Visdynamics Holdings Berhad has net cash of RM13m. This is fairly high at 14% 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 Visdynamics Holdings Berhad's P/E Ratio

Visdynamics Holdings Berhad's P/E is 17.7 which is above average (14.7) in its market. The recent drop in earnings per share might keep value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will! What we know for sure is that investors have become much more excited about Visdynamics Holdings Berhad recently, since they have pushed its P/E ratio from 12.3 to 17.7 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 have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Visdynamics Holdings Berhad 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.