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What Is Shinelong Automotive Lightweight Application's (HKG:1930) P/E Ratio After Its Share Price Rocketed?

Shinelong Automotive Lightweight Application (HKG:1930) shareholders are no doubt pleased to see that the share price has bounced 36% in the last month alone, although it is still down 6.5% over the last quarter. Longer term shareholders are no doubt thankful for the recovery in the share price, since it's pretty much flat for the year, even after the recent pop.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

Check out our latest analysis for Shinelong Automotive Lightweight Application

How Does Shinelong Automotive Lightweight Application's P/E Ratio Compare To Its Peers?

Shinelong Automotive Lightweight Application's P/E of 16.03 indicates some degree of optimism towards the stock. As you can see below, Shinelong Automotive Lightweight Application has a higher P/E than the average company (10.0) in the auto components industry.

SEHK:1930 Price Estimation Relative to Market April 9th 2020
SEHK:1930 Price Estimation Relative to Market April 9th 2020

That means that the market expects Shinelong Automotive Lightweight Application 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

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. 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.

Shinelong Automotive Lightweight Application's earnings per share fell by 36% in the last twelve months.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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).

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.

So What Does Shinelong Automotive Lightweight Application's Balance Sheet Tell Us?

Shinelong Automotive Lightweight Application has net cash of CN¥87m. This is fairly high at 20% 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 Shinelong Automotive Lightweight Application's P/E Ratio

Shinelong Automotive Lightweight Application's P/E is 16.0 which is above average (9.4) in its market. The recent drop in earnings per share might keep value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will. What is very clear is that the market has become more optimistic about Shinelong Automotive Lightweight Application over the last month, with the P/E ratio rising from 11.8 back then to 16.0 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

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. 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 Shinelong Automotive Lightweight Application. 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.