A Sliding Share Price Has Us Looking At Cambridge Technology Enterprises Limited's (NSE:CTE) P/E Ratio

Unfortunately for some shareholders, the Cambridge Technology Enterprises (NSE:CTE) share price has dived 30% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 58% in that time.

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 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.

Check out our latest analysis for Cambridge Technology Enterprises

How Does Cambridge Technology Enterprises's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 4.67 that sentiment around Cambridge Technology Enterprises isn't particularly high. We can see in the image below that the average P/E (10.8) for companies in the it industry is higher than Cambridge Technology Enterprises's P/E.

Its relatively low P/E ratio indicates that Cambridge Technology Enterprises shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Cambridge Technology Enterprises shrunk earnings per share by 63% over the last year. But it has grown its earnings per share by 134% per year over the last five years. And over the longer term (3 years) earnings per share have decreased 20% annually. This might lead to low expectations.

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. 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.

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 Cambridge Technology Enterprises's P/E?

Cambridge Technology Enterprises's net debt is 11% of its market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Bottom Line On Cambridge Technology Enterprises's P/E Ratio

Cambridge Technology Enterprises trades on a P/E ratio of 4.7, which is below the IN market average of 13.0. Since it only carries a modest debt load, it's likely the low expectations implied by the P/E ratio arise from the lack of recent earnings growth. What can be absolutely certain is that the market has become more pessimistic about Cambridge Technology Enterprises over the last month, with the P/E ratio falling from 6.7 back then to 4.7 today. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: Cambridge Technology Enterprises 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 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.