Those holding PL Group (WSE:PLG) shares must be pleased that the share price has rebounded 32% in the last thirty days. But unfortunately, the stock is still down by 16% over a quarter. The full year gain of 15% is pretty reasonable, too.
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). 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 PL Group’s P/E Ratio Compare To Its Peers?
PL Group’s P/E of 7.89 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (15.1) for companies in the specialty retail industry is higher than PL Group’s P/E.
This suggests that market participants think PL Group will underperform other companies in its industry. Since the market seems unimpressed with PL Group, it’s quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the ‘E’ will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
PL Group shrunk earnings per share by 14% over the last year. But over the longer term (5 years) earnings per share have increased by 1.3%.
Remember: P/E Ratios Don’t Consider The Balance Sheet
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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).
Is Debt Impacting PL Group’s P/E?
The extra options and safety that comes with PL Group’s zł803k net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On PL Group’s P/E Ratio
PL Group’s P/E is 7.9 which is below average (11.9) in the PL market. The recent drop in earnings per share would make investors cautious, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there’s real potential that the low P/E could eventually indicate undervaluation. What we know for sure is that investors are becoming less uncomfortable about PL Group’s prospects, since they have pushed its P/E ratio from 6.0 to 7.9 over the last month. For those who like to invest in turnarounds, that might mean it’s time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.
Investors have an opportunity when market expectations about a stock are wrong. 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. We don’t have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.
But note: PL Group 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 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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