Unfortunately for some shareholders, the Kingsley Edugroup (HKG:8105) share price has dived 40% in the last thirty days. The stock has been solid, longer term, gaining 35% in the last year.
All else being equal, a share price drop should make a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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 Kingsley Edugroup
How Does Kingsley Edugroup's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 76.78 that there is some investor optimism about Kingsley Edugroup. As you can see below, Kingsley Edugroup has a much higher P/E than the average company (16.8) in the consumer services industry.
Its relatively high P/E ratio indicates that Kingsley Edugroup shareholders think it will perform better than other companies in its industry classification. 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
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Most would be impressed by Kingsley Edugroup earnings growth of 17% in the last year.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
Kingsley Edugroup's Balance Sheet
Kingsley Edugroup has net debt equal to 35% of its market cap. While it's worth keeping this in mind, it isn't a worry.