Yahoo Finance A Sliding Share Price Has Us Looking At G5 Entertainment AB (publ)'s (STO:G5EN) P/E Ratio
Of late the G5 Entertainment (STO:G5EN) share price has softened like an ice cream in the sun, melting a full 32%. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 44% drop over twelve months. But shareholders who bought at the right time will be smiling, given that the stock is up 7.3% over the last quarter.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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. 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.
See our latest analysis for G5 Entertainment
Does G5 Entertainment Have A Relatively High Or Low P/E For Its Industry?
G5 Entertainment's P/E of 12.46 indicates relatively low sentiment towards the stock. If you look at the image below, you can see G5 Entertainment has a lower P/E than the average (27.2) in the entertainment industry classification.
This suggests that market participants think G5 Entertainment will underperform other companies in its 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
G5 Entertainment saw earnings per share decrease by 48% last year. But EPS is up 23% over the last 3 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. 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.
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 G5 Entertainment's Balance Sheet Tell Us?
With net cash of kr128m, G5 Entertainment has a very strong balance sheet, which may be important for its business. Having said that, at 15% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On G5 Entertainment's P/E Ratio
G5 Entertainment's P/E is 12.5 which is below average (18.3) in the SE market. Falling earnings per share are likely to be keeping potential buyers away, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary. Given G5 Entertainment's P/E ratio has declined from 18.4 to 12.5 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors have an opportunity when market expectations about a stock are wrong. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than G5 Entertainment. So you may wish to see this free collection of other companies that have grown earnings strongly.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.
