Hope Education Group (HKG:1765) shares have continued recent momentum with a 34% gain in the last month alone. That's tops off a massive gain of 142% 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
How Does Hope Education Group's P/E Ratio Compare To Its Peers?
Hope Education Group's P/E of 32.44 indicates some degree of optimism towards the stock. As you can see below, Hope Education Group has a higher P/E than the average company (15.2) in the consumer services industry.
Its relatively high P/E ratio indicates that Hope Education Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. 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. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Hope Education Group's 148% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
Is Debt Impacting Hope Education Group's P/E?
The extra options and safety that comes with Hope Education Group's CN¥43m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Hope Education Group's P/E Ratio
Hope Education Group has a P/E of 32.4. That's significantly higher than the average in its market, which is 9.3. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Hope Education Group to have a high P/E ratio. What is very clear is that the market has become significantly more optimistic about Hope Education Group over the last month, with the P/E ratio rising from 24.3 back then to 32.4 today. 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. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Hope Education Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.