Yahoo Finance What Is Mitchell Services's (ASX:MSV) P/E Ratio After Its Share Price Rocketed?
Mitchell Services (ASX:MSV) shareholders are no doubt pleased to see that the share price has bounced 16% in the last month alone, although it is still down 37% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 40% in the last year.
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). 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for Mitchell Services
Does Mitchell Services Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 6.58 that sentiment around Mitchell Services isn't particularly high. The image below shows that Mitchell Services has a lower P/E than the average (8.4) P/E for companies in the metals and mining industry.
Mitchell Services's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Mitchell Services's earnings per share fell by 6.7% in the last twelve months.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.
Mitchell Services's Balance Sheet
Net debt totals 12% of Mitchell Services's market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.
The Bottom Line On Mitchell Services's P/E Ratio
Mitchell Services's P/E is 6.6 which is below average (13.9) in the AU market. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. What we know for sure is that investors are becoming less uncomfortable about Mitchell Services's prospects, since they have pushed its P/E ratio from 5.7 to 6.6 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.
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