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It's great to see Renew Holdings (LON:RNWH) shareholders have their patience rewarded with a 30% share price pop in the last month. The full year gain of 47% is pretty reasonable, too.
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). 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for Renew Holdings
Does Renew Holdings Have A Relatively High Or Low P/E For Its Industry?
Renew Holdings's P/E of 16.75 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (10.3) for companies in the construction industry is lower than Renew Holdings's P/E.
That means that the market expects Renew Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, Renew Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 117% gain was both fast and well deserved. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 7.9%.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Renew Holdings's Balance Sheet
Renew Holdings's net debt is 2.7% of its market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.