It's great to see Fullwealth Construction Holdings (HKG:1034) shareholders have their patience rewarded with a 34% share price pop in the last month. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 63% 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business 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.

See our latest analysis for Fullwealth Construction Holdings

Does Fullwealth Construction Holdings Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 30.28 that there is some investor optimism about Fullwealth Construction Holdings. You can see in the image below that the average P/E (10.2) for companies in the construction industry is lower than Fullwealth Construction Holdings's P/E.

That means that the market expects Fullwealth Construction Holdings will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Fullwealth Construction Holdings's earnings per share fell by 58% in the last twelve months.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. 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.

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.

How Does Fullwealth Construction Holdings's Debt Impact Its P/E Ratio?

Fullwealth Construction Holdings has net cash of HK$42m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On Fullwealth Construction Holdings's P/E Ratio

Fullwealth Construction Holdings trades on a P/E ratio of 30.3, which is above its market average of 10.4. Falling earnings per share is probably keeping traditional value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will. What we know for sure is that investors have become much more excited about Fullwealth Construction Holdings recently, since they have pushed its P/E ratio from 22.6 to 30.3 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Fullwealth Construction Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.