It's great to see Kin Yat Holdings (HKG:638) shareholders have their patience rewarded with a 32% share price pop in the last month. But shareholders may not all be feeling jubilant, since the share price is still down 15% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Check out our latest analysis for Kin Yat Holdings
How Does Kin Yat Holdings's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 3.49 that sentiment around Kin Yat Holdings isn't particularly high. We can see in the image below that the average P/E (13.0) for companies in the consumer durables industry is higher than Kin Yat Holdings's P/E.
Its relatively low P/E ratio indicates that Kin Yat Holdings shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Kin Yat Holdings, it's quite possible it could surprise on the upside. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
It's great to see that Kin Yat Holdings grew EPS by 10% in the last year. And earnings per share have improved by 44% annually, over the last five years. So one might expect an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.