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CGN New Energy Holdings (HKG:1811) shares have continued recent momentum with a 39% gain in the last month alone. The full year gain of 34% is pretty reasonable, too.
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. 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.
See our latest analysis for CGN New Energy Holdings
How Does CGN New Energy Holdings's P/E Ratio Compare To Its Peers?
CGN New Energy Holdings has a P/E ratio of 7.96. The image below shows that CGN New Energy Holdings has a P/E ratio that is roughly in line with the renewable energy industry average (7.7).
Its P/E ratio suggests that CGN New Energy Holdings shareholders think that in the future it will perform about the same as other companies in its industry classification. So if CGN New Energy Holdings actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
CGN New Energy Holdings increased earnings per share by a whopping 26% last year. And it has improved its earnings per share by 12% per year over the last three years. So we'd generally expect it to have a relatively high P/E ratio. Unfortunately, earnings per share are down 15% a year, over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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).