How Does China Greenland Broad Greenstate Group's (HKG:1253) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

To the annoyance of some shareholders, China Greenland Broad Greenstate Group (HKG:1253) shares are down a considerable 30% in the last month. That drop has capped off a tough year for shareholders, with the share price down 46% in that time.

All else being equal, a share price drop should make a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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 China Greenland Broad Greenstate Group

Does China Greenland Broad Greenstate Group Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 19.25 that there is some investor optimism about China Greenland Broad Greenstate Group. You can see in the image below that the average P/E (11.8) for companies in the commercial services industry is lower than China Greenland Broad Greenstate Group's P/E.

SEHK:1253 Price Estimation Relative to Market, January 26th 2020

That means that the market expects China Greenland Broad Greenstate Group will outperform other companies in its industry. 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

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

China Greenland Broad Greenstate Group shrunk earnings per share by 62% over the last year. And EPS is down 19% a year, over the last 5 years. This could justify a pessimistic P/E.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. 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.

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.

China Greenland Broad Greenstate Group's Balance Sheet

China Greenland Broad Greenstate Group has net debt equal to 46% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On China Greenland Broad Greenstate Group's P/E Ratio

China Greenland Broad Greenstate Group trades on a P/E ratio of 19.2, which is above its market average of 10.4. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years. What can be absolutely certain is that the market has become significantly less optimistic about China Greenland Broad Greenstate Group over the last month, with the P/E ratio falling from 27.5 back then to 19.2 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

Investors should be looking to buy stocks that the market is wrong about. 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 might want to assess this data-rich visualization of earnings, revenue and cash flow.

You might be able to find a better buy than China Greenland Broad Greenstate Group. 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.