CK Life Sciences Int'l. (Holdings) (HKG:775) shares have retraced a considerable 32% in the last month. But plenty of shareholders will still be smiling, given that the stock is up 111% over the last quarter. If we look back over the last year, the stock has gained 100% which is great, even in a bull market.
Assuming nothing else has changed, a lower share price makes a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.
View our latest analysis for CK Life Sciences Int'l. (Holdings)
How Does CK Life Sciences Int'l. (Holdings)'s P/E Ratio Compare To Its Peers?
CK Life Sciences Int'l. (Holdings)'s P/E of 27.74 indicates some degree of optimism towards the stock. The image below shows that CK Life Sciences Int'l. (Holdings) has a higher P/E than the average (23.5) P/E for companies in the biotechs industry.
CK Life Sciences Int'l. (Holdings)'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 delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
CK Life Sciences Int'l. (Holdings) had pretty flat EPS growth in the last year. But over the longer term (5 years) earnings per share have increased by 2.2%.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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 CK Life Sciences Int'l. (Holdings)'s P/E?
CK Life Sciences Int'l. (Holdings)'s net debt is 55% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Verdict On CK Life Sciences Int'l. (Holdings)'s P/E Ratio
CK Life Sciences Int'l. (Holdings) trades on a P/E ratio of 27.7, which is above its market average of 10.1. With meaningful debt and only modest recent earnings growth, the market is either expecting reliable long-term growth, or a near-term improvement. Given CK Life Sciences Int'l. (Holdings)'s P/E ratio has declined from 40.5 to 27.7 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
But note: CK Life Sciences Int'l. (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 email@example.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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