Unfortunately for some shareholders, the LPKF Laser & Electronics (ETR:LPK) share price has dived 54% in the last thirty days. Looking back over the last year, the stock has been a solid performer, with a gain of 38%.
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.
Does LPKF Laser & Electronics Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 18.31 that there is some investor optimism about LPKF Laser & Electronics. The image below shows that LPKF Laser & Electronics has a higher P/E than the average (15.9) P/E for companies in the electronic industry.
Its relatively high P/E ratio indicates that LPKF Laser & Electronics 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 delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
LPKF Laser & Electronics’s 145% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don’t forget that the P/E ratio considers market capitalization. So it won’t reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
Is Debt Impacting LPKF Laser & Electronics’s P/E?
Since LPKF Laser & Electronics holds net cash of €12m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On LPKF Laser & Electronics’s P/E Ratio
LPKF Laser & Electronics trades on a P/E ratio of 18.3, which is above its market average of 15.2. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we’d expect LPKF Laser & Electronics to have a high P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about LPKF Laser & Electronics over the last month, with the P/E ratio falling from 39.5 back then to 18.3 today. 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.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 LPKF Laser & Electronics. 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 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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