Does New England Realty Associates Limited Partnership’s (NYSEMKT:NEN) P/E Ratio Signal A Buying Opportunity?

Unfortunately for some shareholders, the New England Realty Associates Limited Partnership (NYSEMKT:NEN) share price has dived in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 19% over that longer period.

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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for New England Realty Associates Limited Partnership

How Does New England Realty Associates Limited Partnership’s P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 31.42 that there is some investor optimism about New England Realty Associates Limited Partnership. You can see in the image below that the average P/E (16.1) for companies in the real estate industry is lower than New England Realty Associates Limited Partnership’s P/E.

AMEX:NEN Price Estimation Relative to Market, March 13th 2020
AMEX:NEN Price Estimation Relative to Market, March 13th 2020

New England Realty Associates Limited Partnership’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.

It’s nice to see that New England Realty Associates Limited Partnership grew EPS by a stonking 47% in the last year. And its annual EPS growth rate over 5 years is 54%. I’d therefore be a little surprised if its P/E ratio was not relatively high.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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

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).

How Does New England Realty Associates Limited Partnership’s Debt Impact Its P/E Ratio?

New England Realty Associates Limited Partnership’s net debt is considerable, at 122% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.

The Verdict On New England Realty Associates Limited Partnership’s P/E Ratio

New England Realty Associates Limited Partnership has a P/E of 31.4. That’s higher than the average in its market, which is 13.3. Its meaningful level of debt should warrant a lower P/E ratio, but the fast EPS growth is a positive. So it seems likely the market is overlooking the debt because of the fast earnings growth. Given New England Realty Associates Limited Partnership’s P/E ratio has declined from 31.4 to 31.4 in the last month, we know for sure that the market is less confident 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 a contrarian, it may signal opportunity.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. We don’t have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: New England Realty Associates Limited Partnership 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 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.