It's great to see Elegant Hotels Group (LON:EHG) shareholders have their patience rewarded with a 57% share price pop in the last month. Looking back a bit further, we're also happy to report the stock is up 69% 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). 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.
View our latest analysis for Elegant Hotels Group
Does Elegant Hotels Group Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 10.04 that sentiment around Elegant Hotels Group isn't particularly high. If you look at the image below, you can see Elegant Hotels Group has a lower P/E than the average (24.7) in the hospitality industry classification.
This suggests that market participants think Elegant Hotels Group will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or 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. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, Elegant Hotels Group grew EPS by a whopping 42% in the last year. And it has improved its earnings per share by 12% per year over the last three years. So we'd generally expect it to have a relatively high P/E ratio. In contrast, EPS has decreased by 3.2%, annually, over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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).