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RMH Holdings (HKG:8437) shareholders are no doubt pleased to see that the share price has bounced 46% in the last month alone, although it is still down 12% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 44% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. One way to gauge market expectations of a stock 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.
View our latest analysis for RMH Holdings
How Does RMH Holdings's P/E Ratio Compare To Its Peers?
RMH Holdings's P/E of 18.33 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (15.6) for companies in the healthcare industry is lower than RMH Holdings's P/E.
RMH Holdings'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 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
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Most would be impressed by RMH Holdings earnings growth of 20% in the last year. In contrast, EPS has decreased by 37%, annually, over 3 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. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.