The Shanghai Jin Jiang Capital (HKG:2006) share price has done well in the last month, posting a gain of 32%. But shareholders may not all be feeling jubilant, since the share price is still down 23% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for Shanghai Jin Jiang Capital
Does Shanghai Jin Jiang Capital Have A Relatively High Or Low P/E For Its Industry?
Shanghai Jin Jiang Capital's P/E of 11.09 indicates relatively low sentiment towards the stock. The image below shows that Shanghai Jin Jiang Capital has a lower P/E than the average (14.4) P/E for companies in the hospitality industry.
Shanghai Jin Jiang Capital's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Shanghai Jin Jiang Capital, 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. 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.
Shanghai Jin Jiang Capital's earnings per share fell by 7.2% in the last twelve months. And EPS is down 3.6% a year, over the last 3 years. So we might expect a relatively low P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.