Unfortunately for some shareholders, the Bright Smart Securities & Commodities Group (HKG:1428) share price has dived 35% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 41% in that time.
Assuming nothing else has changed, a lower share price makes a stock more 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). 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). 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.
Does Bright Smart Securities & Commodities Group Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 4.37 that sentiment around Bright Smart Securities & Commodities Group isn’t particularly high. If you look at the image below, you can see Bright Smart Securities & Commodities Group has a lower P/E than the average (11.6) in the capital markets industry classification.
Its relatively low P/E ratio indicates that Bright Smart Securities & Commodities Group shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Bright Smart Securities & Commodities Group saw earnings per share decrease by 24% last year. But it has grown its earnings per share by 10% per year over the last five years.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. 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.
How Does Bright Smart Securities & Commodities Group’s Debt Impact Its P/E Ratio?
Net debt totals a substantial 160% of Bright Smart Securities & Commodities Group’s market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On Bright Smart Securities & Commodities Group’s P/E Ratio
Bright Smart Securities & Commodities Group has a P/E of 4.4. That’s below the average in the HK market, which is 10.0. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. Given Bright Smart Securities & Commodities Group’s P/E ratio has declined from 6.8 to 4.4 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
Investors have an opportunity when market expectations about a stock are wrong. 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.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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