Apex Frozen Foods (NSE:APEX) shares have continued recent momentum with a 41% gain in the last month alone. And the full year gain of 19% isn’t too shabby, either!
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 Apex Frozen Foods’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 26.99 that there is some investor optimism about Apex Frozen Foods. The image below shows that Apex Frozen Foods has a higher P/E than the average (14.0) P/E for companies in the food industry.
Its relatively high P/E ratio indicates that Apex Frozen Foods shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. 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.
Apex Frozen Foods’s earnings per share fell by 41% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 16%.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).
So What Does Apex Frozen Foods’s Balance Sheet Tell Us?
Net debt totals just 9.5% of Apex Frozen Foods’s market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On Apex Frozen Foods’s P/E Ratio
Apex Frozen Foods trades on a P/E ratio of 27.0, which is above its market average of 13.8. With some debt but no EPS growth last year, the market has high expectations of future profits. What we know for sure is that investors have become much more excited about Apex Frozen Foods recently, since they have pushed its P/E ratio from 19.1 to 27.0 over the last month. For those who prefer to invest with the flow of momentum, that might mean it’s time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at 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. Simply Wall St has no position in the stocks mentioned.
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