Those holding Ramsdens Holdings (LON:RFX) shares must be pleased that the share price has rebounded 24% in the last thirty days. But unfortunately, the stock is still down by 48% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 29% in the last year.
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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
View our latest analysis for Ramsdens Holdings
Does Ramsdens Holdings Have A Relatively High Or Low P/E For Its Industry?
Ramsdens Holdings's P/E of 6.52 indicates some degree of optimism towards the stock. The image below shows that Ramsdens Holdings has a higher P/E than the average (5.0) P/E for companies in the consumer finance industry.
Ramsdens Holdings's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. 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
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Ramsdens Holdings increased earnings per share by an impressive 24% over the last twelve months. And its annual EPS growth rate over 3 years is 36%. So one might expect an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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 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.
Is Debt Impacting Ramsdens Holdings's P/E?
With net cash of UK£12m, Ramsdens Holdings has a very strong balance sheet, which may be important for its business. Having said that, at 31% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Bottom Line On Ramsdens Holdings's P/E Ratio
Ramsdens Holdings has a P/E of 6.5. That's below the average in the GB market, which is 13.5. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic. What we know for sure is that investors are becoming less uncomfortable about Ramsdens Holdings's prospects, since they have pushed its P/E ratio from 5.3 to 6.5 over the last month. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 Ramsdens Holdings. 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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