What Is Shaanxi Northwest New Technology Industry's (HKG:8258) P/E Ratio After Its Share Price Rocketed?

It's really great to see that even after a strong run, Shaanxi Northwest New Technology Industry (HKG:8258) shares have been powering on, with a gain of 47% in the last thirty days. But shareholders may not all be feeling jubilant, since the share price is still down 27% in the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. 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.

Check out our latest analysis for Shaanxi Northwest New Technology Industry

Does Shaanxi Northwest New Technology Industry Have A Relatively High Or Low P/E For Its Industry?

Shaanxi Northwest New Technology Industry's P/E of 9.51 indicates some degree of optimism towards the stock. As you can see below, Shaanxi Northwest New Technology Industry has a higher P/E than the average company (6.7) in the chemicals industry.

Shaanxi Northwest New Technology Industry's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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 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.

Shaanxi Northwest New Technology Industry's earnings made like a rocket, taking off 76% last year. Even better, EPS is up 70% per year over three years. So you might say it really deserves to have an above-average P/E ratio.

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

The 'Price' in P/E reflects the market capitalization of the company. 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 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.

Is Debt Impacting Shaanxi Northwest New Technology Industry's P/E?

With net cash of CN¥61m, Shaanxi Northwest New Technology Industry has a very strong balance sheet, which may be important for its business. Having said that, at 43% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Shaanxi Northwest New Technology Industry's P/E Ratio

Shaanxi Northwest New Technology Industry has a P/E of 9.5. That's around the same as the average in the HK market, which is 9.1. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Shaanxi Northwest New Technology Industry to have a higher P/E ratio. What we know for sure is that investors are becoming less uncomfortable about Shaanxi Northwest New Technology Industry's prospects, since they have pushed its P/E ratio from 6.5 to 9.5 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph 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 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.