How Does Yeebo (International Holdings)'s (HKG:259) P/E Compare To Its Industry, After Its Big Share Price Gain?

Yeebo (International Holdings) (HKG:259) shares have had a really impressive month, gaining 31%, after some slippage. Unfortunately, the full year gain of 5.1% wasn't so sweet.

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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for Yeebo (International Holdings)

Does Yeebo (International Holdings) Have A Relatively High Or Low P/E For Its Industry?

Yeebo (International Holdings)'s P/E of 5.43 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (9.0) for companies in the electronic industry is higher than Yeebo (International Holdings)'s P/E.

Yeebo (International Holdings)'s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Yeebo (International Holdings), it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, 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.

Yeebo (International Holdings)'s earnings made like a rocket, taking off 102% last year. The sweetener is that the annual five year growth rate of 19% is also impressive. So I'd be surprised if the P/E ratio was not above average. Unfortunately, earnings per share are down 19% a year, over 3 years.

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

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

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 Yeebo (International Holdings)'s P/E?

With net cash of HK$249m, Yeebo (International Holdings) has a very strong balance sheet, which may be important for its business. Having said that, at 18% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On Yeebo (International Holdings)'s P/E Ratio

Yeebo (International Holdings) has a P/E of 5.4. That's below the average in the HK market, which is 9.9. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The below average P/E ratio suggests that market participants don't believe the strong growth will continue. What we know for sure is that investors are becoming less uncomfortable about Yeebo (International Holdings)'s prospects, since they have pushed its P/E ratio from 4.2 to 5.4 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 it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Yeebo (International Holdings) may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.