How Does Guangdong Adway Construction (Group) Holdings's (HKG:6189) P/E Compare To Its Industry, After The Share Price Drop?

To the annoyance of some shareholders, Guangdong Adway Construction (Group) Holdings (HKG:6189) shares are down a considerable 33% in the last month. Given the 66% drop over the last year, some shareholders might be worried that they have become bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.

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). 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.

See our latest analysis for Guangdong Adway Construction (Group) Holdings

How Does Guangdong Adway Construction (Group) Holdings's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 3.72 that sentiment around Guangdong Adway Construction (Group) Holdings isn't particularly high. The image below shows that Guangdong Adway Construction (Group) Holdings has a lower P/E than the average (9.9) P/E for companies in the construction industry.

This suggests that market participants think Guangdong Adway Construction (Group) Holdings will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.

Guangdong Adway Construction (Group) Holdings saw earnings per share improve by -9.5% last year. And earnings per share have improved by 9.3% annually, over the last five years. But earnings per share are down 1.6% per year over the last three years.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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.

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.

Guangdong Adway Construction (Group) Holdings's Balance Sheet

Net debt is 50% of Guangdong Adway Construction (Group) Holdings's market cap. While it's worth keeping this in mind, it isn't a worry.

The Bottom Line On Guangdong Adway Construction (Group) Holdings's P/E Ratio

Guangdong Adway Construction (Group) Holdings trades on a P/E ratio of 3.7, which is below the HK market average of 10.6. EPS grew over the last twelve months, and debt levels are quite reasonable. The P/E ratio implies the market is cautious about longer term prospects. Given Guangdong Adway Construction (Group) Holdings's P/E ratio has declined from 5.5 to 3.7 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Guangdong Adway Construction (Group) Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.