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Zhejiang Tengy Environmental Technology (HKG:1527) shares have had a really impressive month, gaining 64%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 25% 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). 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). 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 Zhejiang Tengy Environmental Technology
Does Zhejiang Tengy Environmental Technology Have A Relatively High Or Low P/E For Its Industry?
Zhejiang Tengy Environmental Technology's P/E of 16.35 indicates some degree of optimism towards the stock. The image below shows that Zhejiang Tengy Environmental Technology has a higher P/E than the average (10.5) P/E for companies in the machinery industry.
Zhejiang Tengy Environmental Technology's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. 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.
Zhejiang Tengy Environmental Technology shrunk earnings per share by 68% over the last year. And it has shrunk its earnings per share by 4.9% per year over the last five years. This might lead to muted expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.