Yin He Holdings (HKG:8260) shareholders are no doubt pleased to see that the share price has had a great month, posting a 39% gain, recovering from prior weakness. But shareholders may not all be feeling jubilant, since the share price is still down 48% 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. 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 Yin He Holdings
How Does Yin He Holdings's P/E Ratio Compare To Its Peers?
Yin He Holdings's P/E of 17.28 indicates relatively low sentiment towards the stock. The image below shows that Yin He Holdings has a lower P/E than the average (20.8) P/E for companies in the professional services industry.
Its relatively low P/E ratio indicates that Yin He Holdings shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Yin He Holdings shrunk earnings per share by 67% over the last year. And EPS is down 37% a year, over the last 3 years. This might lead to low expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
Yin He Holdings's Balance Sheet
Yin He Holdings has net debt equal to 30% of its market cap. While it's worth keeping this in mind, it isn't a worry.