CSY Spólka Akcyjna (WSE:CSY) shareholders are no doubt pleased to see that the share price has had a great month, posting a 45% gain, recovering from prior weakness. The bad news is that even after that recovery shareholders are still underwater by about 6.8% for the full year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors' expectations of a business 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.
Does CSY Spólka Akcyjna Have A Relatively High Or Low P/E For Its Industry?
CSY Spólka Akcyjna's P/E of 16.03 indicates some degree of optimism towards the stock. As you can see below, CSY Spólka Akcyjna has a higher P/E than the average company (7.7) in the machinery industry.
CSY Spólka Akcyjna'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 further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
It's nice to see that CSY Spólka Akcyjna grew EPS by a stonking 42% in the last year.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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).
CSY Spólka Akcyjna's Balance Sheet
Since CSY Spólka Akcyjna holds net cash of zł4.1m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On CSY Spólka Akcyjna's P/E Ratio
CSY Spólka Akcyjna has a P/E of 16.0. That's higher than the average in its market, which is 11.8. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect CSY Spólka Akcyjna to have a high P/E ratio. What we know for sure is that investors have become more excited about CSY Spólka Akcyjna recently, since they have pushed its P/E ratio from 11.1 to 16.0 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
Investors should be looking to buy stocks that the market is wrong about. 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 could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: CSY Spólka Akcyjna 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).
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.