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C&D International Investment Group (HKG:1908) shareholders are no doubt pleased to see that the share price has had a great month, posting a 34% gain, recovering from prior weakness. And the full year gain of 13% isn't too shabby, either!
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.
See our latest analysis for C&D International Investment Group
How Does C&D International Investment Group's P/E Ratio Compare To Its Peers?
C&D International Investment Group's P/E of 5.19 indicates relatively low sentiment towards the stock. The image below shows that C&D International Investment Group has a lower P/E than the average (6.2) P/E for companies in the real estate industry.
Its relatively low P/E ratio indicates that C&D International Investment Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with C&D International Investment Group, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.
C&D International Investment Group's earnings per share grew by 3.1% in the last twelve months. And its annual EPS growth rate over 5 years is 89%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.