Yin He Holdings (HKG:8260) shareholders are no doubt pleased to see that the share price has bounced 42% in the last month alone, although it is still down 29% over the last quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 55% share price decline throughout the year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for Yin He Holdings
Does Yin He Holdings Have A Relatively High Or Low P/E For Its Industry?
Yin He Holdings's P/E is 20.92. As you can see below Yin He Holdings has a P/E ratio that is fairly close for the average for the professional services industry, which is 20.0.
Yin He Holdings's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Yin He 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
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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Yin He Holdings shrunk earnings per share by 62% over the last year. But over the longer term (5 years) earnings per share have increased by 60%. And EPS is down 29% a year, over the last 3 years. This might lead to low expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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).