A Rising Share Price Has Us Looking Closely At MindChamps PreSchool Limited's (SGX:CNE) P/E Ratio

Those holding MindChamps PreSchool (SGX:CNE) shares must be pleased that the share price has rebounded 40% in the last thirty days. But unfortunately, the stock is still down by 22% over a quarter. But that will do little to salve the savage burn caused by the 52% share price decline, over 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 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.

See our latest analysis for MindChamps PreSchool

How Does MindChamps PreSchool's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 11.68 that sentiment around MindChamps PreSchool isn't particularly high. The image below shows that MindChamps PreSchool has a lower P/E than the average (16.2) P/E for companies in the consumer services industry.

Its relatively low P/E ratio indicates that MindChamps PreSchool 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. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. 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.

MindChamps PreSchool saw earnings per share improve by 8.5% last year. And its annual EPS growth rate over 5 years is 14%. In contrast, EPS has decreased by 1.4%, annually, over 3 years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

So What Does MindChamps PreSchool's Balance Sheet Tell Us?

MindChamps PreSchool's net debt equates to 38% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On MindChamps PreSchool's P/E Ratio

MindChamps PreSchool has a P/E of 11.7. That's around the same as the average in the SG market, which is 11.0. When you consider the modest EPS growth last year (along with some debt), it seems the market thinks the growth is sustainable. What we know for sure is that investors have become more excited about MindChamps PreSchool recently, since they have pushed its P/E ratio from 8.4 to 11.7 over the last month. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than MindChamps PreSchool. 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 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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