What Is CGN New Energy Holdings's (HKG:1811) P/E Ratio After Its Share Price Rocketed?

CGN New Energy Holdings (HKG:1811) shares have continued recent momentum with a 39% gain in the last month alone. The full year gain of 34% is pretty reasonable, too.

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). 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). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for CGN New Energy Holdings

How Does CGN New Energy Holdings's P/E Ratio Compare To Its Peers?

CGN New Energy Holdings has a P/E ratio of 7.96. The image below shows that CGN New Energy Holdings has a P/E ratio that is roughly in line with the renewable energy industry average (7.7).

Its P/E ratio suggests that CGN New Energy Holdings shareholders think that in the future it will perform about the same as other companies in its industry classification. So if CGN New Energy Holdings actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

CGN New Energy Holdings increased earnings per share by a whopping 26% last year. And it has improved its earnings per share by 12% per year over the last three years. So we'd generally expect it to have a relatively high P/E ratio. Unfortunately, earnings per share are down 15% a year, over 5 years.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Is Debt Impacting CGN New Energy Holdings's P/E?

Net debt totals a substantial 371% of CGN New Energy Holdings's market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Verdict On CGN New Energy Holdings's P/E Ratio

CGN New Energy Holdings's P/E is 8.0 which is below average (9.0) in the HK market. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If it continues to grow, then the current low P/E may prove to be unjustified. What we know for sure is that investors are becoming less uncomfortable about CGN New Energy Holdings's prospects, since they have pushed its P/E ratio from 5.7 to 8.0 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than CGN New Energy Holdings. 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.

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