To the annoyance of some shareholders, Nan Nan Resources Enterprise (HKG:1229) shares are down a considerable 43% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 52% drop over twelve months.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock 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.
Does Nan Nan Resources Enterprise Have A Relatively High Or Low P/E For Its Industry?
Nan Nan Resources Enterprise’s P/E of 3.23 indicates relatively low sentiment towards the stock. The image below shows that Nan Nan Resources Enterprise has a lower P/E than the average (6.2) P/E for companies in the oil and gas industry.
This suggests that market participants think Nan Nan Resources Enterprise will underperform other companies in its industry. Since the market seems unimpressed with Nan Nan Resources Enterprise, 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. 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.
Nan Nan Resources Enterprise’s earnings per share fell by 43% in the last twelve months.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
Nan Nan Resources Enterprise’s Balance Sheet
With net cash of HK$51m, Nan Nan Resources Enterprise has a very strong balance sheet, which may be important for its business. Having said that, at 37% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Nan Nan Resources Enterprise’s P/E Ratio
Nan Nan Resources Enterprise’s P/E is 3.2 which is below average (10.0) in the HK market. The recent drop in earnings per share would almost certainly temper expectations, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary. What can be absolutely certain is that the market has become more pessimistic about Nan Nan Resources Enterprise over the last month, with the P/E ratio falling from 5.6 back then to 3.2 today. 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.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than Nan Nan Resources Enterprise. 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 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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