Those holding Microequities Asset Management Group (ASX:MAM) shares must be pleased that the share price has rebounded 32% in the last thirty days. But unfortunately, the stock is still down by 31% over a quarter. The bad news is that even after that recovery shareholders are still underwater by about 9.6% for the full year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
How Does Microequities Asset Management Group’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 12.52 that sentiment around Microequities Asset Management Group isn’t particularly high. The image below shows that Microequities Asset Management Group has a lower P/E than the average (17.8) P/E for companies in the capital markets industry.
This suggests that market participants think Microequities Asset Management Group will underperform other companies in its industry. 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
When earnings fall, the ‘E’ decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Microequities Asset Management Group saw earnings per share decrease by 1.2% last year. And it has shrunk its earnings per share by 28% per year over the last three years. This growth rate might warrant a low P/E ratio. So you wouldn’t expect a very high P/E.
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. So it won’t reflect the advantage of cash, or disadvantage of debt. 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.
Is Debt Impacting Microequities Asset Management Group’s P/E?
With net cash of AU$4.3m, Microequities Asset Management Group has a very strong balance sheet, which may be important for its business. Having said that, at 11% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Microequities Asset Management Group’s P/E Ratio
Microequities Asset Management Group trades on a P/E ratio of 12.5, which is below the AU market average of 15.4. Falling earnings per share are likely to be keeping potential buyers away, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there’s real potential that the low P/E could eventually indicate undervaluation. What we know for sure is that investors have become more excited about Microequities Asset Management Group recently, since they have pushed its P/E ratio from 9.5 to 12.5 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is ‘blood in the streets’, 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. Although we don’t have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Microequities Asset Management Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.