To the annoyance of some shareholders, Viscom (ETR:V6C) shares are down a considerable 47% in the last month. And that drop will have no doubt have some shareholders concerned that the 65% 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.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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.
How Does Viscom’s P/E Ratio Compare To Its Peers?
Viscom has a P/E ratio of 16.23. As you can see below Viscom has a P/E ratio that is fairly close for the average for the electronic industry, which is 15.9.
Its P/E ratio suggests that Viscom shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Viscom actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the ‘E’ will be higher. 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.
Viscom saw earnings per share decrease by 56% last year. But EPS is up 2.6% over the last 3 years. And it has shrunk its earnings per share by 8.6% per year over the last five years. This could justify a pessimistic P/E.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
How Does Viscom’s Debt Impact Its P/E Ratio?
Net debt totals just 4.3% of Viscom’s market cap. So it doesn’t have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Verdict On Viscom’s P/E Ratio
Viscom has a P/E of 16.2. That’s around the same as the average in the DE market, which is 15.2. With modest debt, and a lack of recent growth, it would seem the market is expecting improvement in earnings. What can be absolutely certain is that the market has become significantly less optimistic about Viscom over the last month, with the P/E ratio falling from 30.5 back then to 16.2 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.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. 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 Viscom. 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 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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