A Rising Share Price Has Us Looking Closely At Cramo Oyj’s (HEL:CRA1V) P/E Ratio

Those holding Cramo Oyj (HEL:CRA1V) shares must be pleased that the share price has rebounded 30% in the last thirty days. But unfortunately, the stock is still down by 5.7% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 48% in the last year.

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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.

View our latest analysis for Cramo Oyj

Does Cramo Oyj Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 5.75 that sentiment around Cramo Oyj isn’t particularly high. We can see in the image below that the average P/E (13.7) for companies in the trade distributors industry is higher than Cramo Oyj’s P/E.

HLSE:CRA1V Price Estimation Relative to Market, October 2nd 2019
HLSE:CRA1V Price Estimation Relative to Market, October 2nd 2019

Its relatively low P/E ratio indicates that Cramo Oyj shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You 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. When earnings grow, the ‘E’ increases, over time. 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.

Cramo Oyj maintained roughly steady earnings over the last twelve months. But it has grown its earnings per share by 13% per year over the last five years.

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

The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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 Cramo Oyj’s P/E?

Net debt totals 83% of Cramo Oyj’s market cap. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On Cramo Oyj’s P/E Ratio

Cramo Oyj has a P/E of 5.7. That’s below the average in the FI market, which is 20.2. While the recent EPS growth is a positive, the significant amount of debt on the balance sheet may be contributing to pessimistic market expectations. What is very clear is that the market has become less pessimistic about Cramo Oyj over the last month, with the P/E ratio rising from 4.4 back then to 5.7 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you’re more sensitive to price, then you may feel the opportunity has passed.

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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Cramo Oyj 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).

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.

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. Thank you for reading.