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 42% in the last thirty days. The full year gain of 47% is pretty reasonable, too.
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). 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for China Wan Tong Yuan (Holdings)
How Does China Wan Tong Yuan (Holdings)'s P/E Ratio Compare To Its Peers?
China Wan Tong Yuan (Holdings)'s P/E of 12.63 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (14.3) for companies in the consumer services industry is higher than China Wan Tong Yuan (Holdings)'s P/E.
China Wan Tong Yuan (Holdings)'s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
China Wan Tong Yuan (Holdings) saw earnings per share improve by -6.7% last year. And earnings per share have improved by 7.3% annually, over the last three years.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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).
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).