Lumina Group (HKG:8470) shareholders are no doubt pleased to see that the share price has had a great month, posting a 37% gain, recovering from prior weakness. But that gain wasn't enough to make shareholders whole, as the share price is still down 4.1% 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.

Check out our latest analysis for Lumina Group

Does Lumina Group Have A Relatively High Or Low P/E For Its Industry?

Lumina Group's P/E of 9.46 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (12.4) for companies in the commercial services industry is higher than Lumina Group's P/E.

This suggests that market participants think Lumina Group will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. 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.

It's nice to see that Lumina Group grew EPS by a stonking 28% in the last year. And it has bolstered its earnings per share by 6.4% per year over the last five years. So we'd generally expect it to have a relatively high P/E ratio.

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).