CAM Resources Berhad (KLSE:CAMRES) shares have had a really impressive month, gaining 33%, after some slippage. And the full year gain of 19% isn't too shabby, either!
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
How Does CAM Resources Berhad's P/E Ratio Compare To Its Peers?
CAM Resources Berhad's P/E of 23.21 indicates some degree of optimism towards the stock. As you can see below, CAM Resources Berhad has a higher P/E than the average company (10.7) in the consumer durables industry.
That means that the market expects CAM Resources Berhad will outperform other companies in its industry. 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
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
CAM Resources Berhad saw earnings per share decrease by 12% last year. And it has shrunk its earnings per share by 15% per year over the last five years. This could justify a pessimistic P/E.
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.
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 CAM Resources Berhad's P/E?
Net debt totals 90% of CAM Resources Berhad's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On CAM Resources Berhad's P/E Ratio
CAM Resources Berhad's P/E is 23.2 which is above average (14.3) in its market. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company. What is very clear is that the market has become significantly more optimistic about CAM Resources Berhad over the last month, with the P/E ratio rising from 17.4 back then to 23.2 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than CAM Resources Berhad. 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 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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