It's really great to see that even after a strong run, Edvance International Holdings (HKG:8410) shares have been powering on, with a gain of 37% in the last thirty days. But shareholders may not all be feeling jubilant, since the share price is still down 18% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. 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 Edvance International Holdings

Does Edvance International Holdings Have A Relatively High Or Low P/E For Its Industry?

Edvance International Holdings's P/E of 24.19 indicates some degree of optimism towards the stock. The image below shows that Edvance International Holdings has a higher P/E than the average (9.3) P/E for companies in the electronic industry.

Edvance International Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

In the last year, Edvance International Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 56% gain was both fast and well deserved. Even better, EPS is up 44% per year over three years. So you might say it really deserves to have an above-average P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

How Does Edvance International Holdings's Debt Impact Its P/E Ratio?

The extra options and safety that comes with Edvance International Holdings's HK$8.4m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Edvance International Holdings's P/E Ratio

Edvance International Holdings has a P/E of 24.2. That's higher than the average in its market, which is 10.2. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). What we know for sure is that investors have become much more excited about Edvance International Holdings recently, since they have pushed its P/E ratio from 17.6 to 24.2 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.