Unfortunately for some shareholders, the New England Realty Associates Limited Partnership (NYSEMKT:NEN) share price has dived in the last thirty days. Zooming out, the recent drop wiped out a year’s worth of gains, with the share price now back where it was a year ago.
Assuming no other changes, a sharply higher share price makes a stock less 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. 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 New England Realty Associates Limited Partnership’s P/E Ratio Compare To Its Peers?
New England Realty Associates Limited Partnership’s P/E of 35.55 indicates some degree of optimism towards the stock. The image below shows that New England Realty Associates Limited Partnership has a higher P/E than the average (21.5) P/E for companies in the real estate industry.
That means that the market expects New England Realty Associates Limited Partnership will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. 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
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
New England Realty Associates Limited Partnership increased earnings per share by a whopping 47% 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.
Remember: P/E Ratios Don’t Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.
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.
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 105% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Verdict On New England Realty Associates Limited Partnership’s P/E Ratio
New England Realty Associates Limited Partnership has a P/E of 35.5. That’s higher than the average in its market, which is 17.2. While its debt levels are rather high, at least its EPS is growing quickly. So despite the debt it is, perhaps, not unreasonable to see a high P/E ratio. Given New England Realty Associates Limited Partnership’s P/E ratio has declined from 35.5 to 35.5 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 don’t like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.
You might be able to find a better buy than New England Realty Associates Limited Partnership. 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 firstname.lastname@example.org. 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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