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Minth Group (HKG:425) shares have had a really impressive month, gaining 33%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 24% 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). 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.
View our latest analysis for Minth Group
Does Minth Group Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 16.85 that there is some investor optimism about Minth Group. You can see in the image below that the average P/E (11.6) for companies in the auto components industry is lower than Minth Group's P/E.
That means that the market expects Minth Group will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Minth Group shrunk earnings per share by 20% over the last year. But over the longer term (5 years) earnings per share have increased by 7.6%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
Minth Group's Balance Sheet
Minth Group has net cash of CN¥913m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.