RMH Holdings (HKG:8437) shareholders are no doubt pleased to see that the share price has bounced 46% in the last month alone, although it is still down 12% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 44% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

View our latest analysis for RMH Holdings

How Does RMH Holdings's P/E Ratio Compare To Its Peers?

RMH Holdings's P/E of 18.33 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (15.6) for companies in the healthcare industry is lower than RMH Holdings's P/E.

RMH Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. 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

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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Most would be impressed by RMH Holdings earnings growth of 20% in the last year. In contrast, EPS has decreased by 37%, annually, over 3 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

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. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

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

With net cash of S$13m, RMH Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 78% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On RMH Holdings's P/E Ratio

RMH Holdings trades on a P/E ratio of 18.3, which is above its market average of 10.5. With cash in the bank the company has plenty of growth options -- and it is already on the right track. Therefore it seems reasonable that the market would have relatively high expectations of the company What we know for sure is that investors have become much more excited about RMH Holdings recently, since they have pushed its P/E ratio from 12.5 to 18.3 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 RMH 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).

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.

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. Thank you for reading.