Mineral Midrange (WSE:MND) shareholders are no doubt pleased to see that the share price has had a great month, posting a 78% gain, recovering from prior weakness. Longer term shareholders are no doubt thankful for the recovery in the share price, since it’s pretty much flat for the year, even after the recent pop.
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. Perhaps the simplest way to get a read on investors’ expectations of a business 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.
Does Mineral Midrange Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 6.75 that sentiment around Mineral Midrange isn’t particularly high. The image below shows that Mineral Midrange has a lower P/E than the average (9.7) P/E for companies in the it industry.
Mineral Midrange’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Mineral Midrange, it’s quite possible it could surprise on the upside. 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. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Mineral Midrange shrunk earnings per share by 56% over the last year. But it has grown its earnings per share by 4.6% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 11% annually. This growth rate might warrant a below average P/E ratio.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.
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.
How Does Mineral Midrange’s Debt Impact Its P/E Ratio?
The extra options and safety that comes with Mineral Midrange’s zł156k net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Mineral Midrange’s P/E Ratio
Mineral Midrange’s P/E is 6.8 which is below average (10.4) in the PL market. Falling earnings per share are likely to be keeping potential buyers away, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity. What we know for sure is that investors are becoming less uncomfortable about Mineral Midrange’s prospects, since they have pushed its P/E ratio from 3.8 to 6.8 over the last month. 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.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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.
But note: Mineral Midrange 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).
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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.