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Those holding Melco International Development (HKG:200) shares must be pleased that the share price has rebounded 38% in the last thirty days. But unfortunately, the stock is still down by 33% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 26% 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. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for Melco International Development
Does Melco International Development Have A Relatively High Or Low P/E For Its Industry?
Melco International Development's P/E of 31.65 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (15.0) for companies in the hospitality industry is lower than Melco International Development's P/E.
Melco International Development's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Notably, Melco International Development grew EPS by a whopping 33% in the last year. But earnings per share are down 14% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.