To the annoyance of some shareholders, Maisons du Monde (EPA:MDM) shares are down a considerable 44% in the last month. And that drop will have no doubt have some shareholders concerned that the 60% share price decline, over the last year, has turned them into bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Does Maisons du Monde Have A Relatively High Or Low P/E For Its Industry?
Maisons du Monde’s P/E is 5.66. As you can see below Maisons du Monde has a P/E ratio that is fairly close for the average for the specialty retail industry, which is 5.7.
Its P/E ratio suggests that Maisons du Monde shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Maisons du Monde actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Maisons du Monde’s earnings per share fell by 5.3% in the last twelve months.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Maisons du Monde’s Debt Impact Its P/E Ratio?
Maisons du Monde’s net debt equates to 43% of its market capitalization. While that’s enough to warrant consideration, it doesn’t really concern us.
The Bottom Line On Maisons du Monde’s P/E Ratio
Maisons du Monde has a P/E of 5.7. That’s below the average in the FR market, which is 12.8. With only modest debt, it’s likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. Given Maisons du Monde’s P/E ratio has declined from 10.1 to 5.7 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 to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Maisons du Monde 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).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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