What Is GeneReach Biotechnology's (GTSM:4171) P/E Ratio After Its Share Price Rocketed?

It's great to see GeneReach Biotechnology (GTSM:4171) shareholders have their patience rewarded with a 56% share price pop in the last month. Zooming out, the annual gain of 150% knocks our socks off.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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.

See our latest analysis for GeneReach Biotechnology

How Does GeneReach Biotechnology's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 49.49 that there is some investor optimism about GeneReach Biotechnology. As you can see below, GeneReach Biotechnology has a higher P/E than the average company (19.0) in the medical equipment industry.

GeneReach Biotechnology's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

In the last year, GeneReach Biotechnology grew EPS like Taylor Swift grew her fan base back in 2010; the 141% gain was both fast and well deserved.

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. 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.

Is Debt Impacting GeneReach Biotechnology's P/E?

Since GeneReach Biotechnology holds net cash of NT$177m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Verdict On GeneReach Biotechnology's P/E Ratio

GeneReach Biotechnology's P/E is 49.5 which is way above average (14.9) in its market. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect GeneReach Biotechnology to have a high P/E ratio. What is very clear is that the market has become significantly more optimistic about GeneReach Biotechnology over the last month, with the P/E ratio rising from 31.7 back then to 49.5 today. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than GeneReach Biotechnology. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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