Unfortunately for some shareholders, the New Wave Group (STO:NEWA B) share price has dived 57% in the last thirty days. And that drop will have no doubt have some shareholders concerned that the 60% share price decline, over the last year, has turned them into bagholders. For those wondering, a bagholder is someone who keeps holding a losing stock indefinitely, without taking the time to consider its prospects carefully, going forward.
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. 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.
How Does New Wave Group’s P/E Ratio Compare To Its Peers?
New Wave Group’s P/E of 4.23 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (14.3) for companies in the luxury industry is higher than New Wave Group’s P/E.
New Wave Group’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with New Wave Group, it’s quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
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. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
New Wave Group saw earnings per share improve by 3.3% last year. And it has bolstered its earnings per share by 16% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does New Wave Group’s Balance Sheet Tell Us?
Net debt totals a substantial 136% of New Wave Group’s market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.
The Bottom Line On New Wave Group’s P/E Ratio
New Wave Group trades on a P/E ratio of 4.2, which is below the SE market average of 14.4. It’s good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations. Given New Wave Group’s P/E ratio has declined from 9.9 to 4.2 in the last month, we know for sure that the market is more worried about the business today, than it was back then. 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.
Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than New Wave Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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