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It's really great to see that even after a strong run, Nexion Technologies (HKG:8420) shares have been powering on, with a gain of 51% in the last thirty days. But shareholders may not all be feeling jubilant, since the share price is still down 19% 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
View our latest analysis for Nexion Technologies
Does Nexion Technologies Have A Relatively High Or Low P/E For Its Industry?
Nexion Technologies's P/E of 16.72 indicates some degree of optimism towards the stock. As you can see below, Nexion Technologies has a higher P/E than the average company (11.8) in the it industry.
That means that the market expects Nexion Technologies will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. 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
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Nexion Technologies saw earnings per share decrease by 69% last year. And over the longer term (3 years) earnings per share have decreased 30% annually. This might lead to low expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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).
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.
Nexion Technologies's Balance Sheet
Nexion Technologies has net cash of US$5.9m. This is fairly high at 54% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.