Unfortunately for some shareholders, the ENAV (BIT:ENAV) share price has dived 38% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 25% over that longer period.
All else being equal, a share price drop should make a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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 ENAV
How Does ENAV’s P/E Ratio Compare To Its Peers?
ENAV’s P/E of 16.58 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (10.0) for companies in the infrastructure industry is lower than ENAV’s P/E.
Its relatively high P/E ratio indicates that ENAV shareholders think it will perform better than other companies in its industry classification. 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. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
ENAV saw earnings per share improve by 3.5% last year. And earnings per share have improved by 44% annually, over the last five years.
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
ENAV’s Balance Sheet
With net cash of €511m, ENAV has a very strong balance sheet, which may be important for its business. Having said that, at 27% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On ENAV’s P/E Ratio
ENAV trades on a P/E ratio of 16.6, which is above its market average of 12.7. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth — and the P/E indicates shareholders that will happen! What can be absolutely certain is that the market has become significantly less optimistic about ENAV over the last month, with the P/E ratio falling from 26.6 back then to 16.6 today. 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.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than ENAV. 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.
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