How Does Poolia's (STO:POOL B) P/E Compare To Its Industry, After The Share Price Drop?
Unfortunately for some shareholders, the Poolia (STO:POOL B) share price has dived 39% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 45% drop over twelve months.
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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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). 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 Poolia
How Does Poolia's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 7.82 that sentiment around Poolia isn't particularly high. If you look at the image below, you can see Poolia has a lower P/E than the average (18.1) in the professional services industry classification.
Its relatively low P/E ratio indicates that Poolia shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Poolia, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
In the last year, Poolia grew EPS like Taylor Swift grew her fan base back in 2010; the 89% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 36% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio. Unfortunately, earnings per share are down 14% a year, over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
Is Debt Impacting Poolia's P/E?
Poolia has net cash of kr30m. This is fairly high at 16% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Poolia's P/E Ratio
Poolia has a P/E of 7.8. That's below the average in the SE market, which is 14.1. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The below average P/E ratio suggests that market participants don't believe the strong growth will continue. What can be absolutely certain is that the market has become more pessimistic about Poolia over the last month, with the P/E ratio falling from 12.8 back then to 7.8 today. 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.
Of course you might be able to find a better stock than Poolia. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
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. Thank you for reading.
