Those holding Pentamaster International (HKG:1665) shares must be pleased that the share price has rebounded 45% in the last thirty days. But unfortunately, the stock is still down by 18% over a quarter. Looking back a bit further, we're also happy to report the stock is up 54% 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Does Pentamaster International Have A Relatively High Or Low P/E For Its Industry?
Pentamaster International's P/E of 10.35 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Pentamaster International has a lower P/E than the average (13.8) in the semiconductor industry classification.
Its relatively low P/E ratio indicates that Pentamaster International shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, 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. 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.
Pentamaster International increased earnings per share by a whopping 31% last year. And earnings per share have improved by 55% annually, over the last three years. With that performance, I would expect it to have an above average P/E ratio.
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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting Pentamaster International's P/E?
Pentamaster International has net cash of RM301m. This is fairly high at 22% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Pentamaster International's P/E Ratio
Pentamaster International has a P/E of 10.3. That's higher than the average in its market, which is 9.5. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Pentamaster International to have a high P/E ratio. What we know for sure is that investors have become more excited about Pentamaster International recently, since they have pushed its P/E ratio from 7.1 to 10.3 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.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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.
Of course you might be able to find a better stock than Pentamaster International. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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