How Does MFO Spólka Akcyjna's (WSE:MFO) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the MFO Spólka Akcyjna (WSE:MFO) share price has dived 32% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 35% in that time.

Assuming nothing else has changed, a lower share price makes a stock more 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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

See our latest analysis for MFO Spólka Akcyjna

How Does MFO Spólka Akcyjna's P/E Ratio Compare To Its Peers?

MFO Spólka Akcyjna's P/E of 4.20 indicates relatively low sentiment towards the stock. The image below shows that MFO Spólka Akcyjna has a lower P/E than the average (5.5) P/E for companies in the metals and mining industry.

Its relatively low P/E ratio indicates that MFO Spólka Akcyjna 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. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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. 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. Then, a lower P/E should attract more buyers, pushing the share price up.

MFO Spólka Akcyjna's earnings per share fell by 5.2% in the last twelve months. But it has grown its earnings per share by 26% per year over the last five years.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. 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.

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 MFO Spólka Akcyjna's Debt Impact Its P/E Ratio?

MFO Spólka Akcyjna's net debt equates to 33% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.

The Verdict On MFO Spólka Akcyjna's P/E Ratio

MFO Spólka Akcyjna's P/E is 4.2 which is below average (9.2) in the PL market. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth. Given MFO Spólka Akcyjna's P/E ratio has declined from 6.2 to 4.2 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors should be looking to buy stocks that the market is wrong about. 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 visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than MFO Spólka Akcyjna. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.