A Rising Share Price Has Us Looking Closely At M.T.I Wireless Edge Ltd.'s (LON:MWE) P/E Ratio
M.T.I Wireless Edge (LON:MWE) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month alone, although it is still down 9.9% over the last quarter. The full year gain of 37% is pretty reasonable, too.
Assuming no other changes, a sharply higher share price makes a stock less 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 M.T.I Wireless Edge
Does M.T.I Wireless Edge Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 13.58 that sentiment around M.T.I Wireless Edge isn't particularly high. If you look at the image below, you can see M.T.I Wireless Edge has a lower P/E than the average (15.8) in the communications industry classification.
M.T.I Wireless Edge's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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
P/E ratios primarily reflect market expectations around earnings growth rates. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Most would be impressed by M.T.I Wireless Edge earnings growth of 21% in the last year. And it has bolstered its earnings per share by 47% per year over the last five years. With that performance, you might expect an above average P/E ratio.
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. 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.
How Does M.T.I Wireless Edge's Debt Impact Its P/E Ratio?
M.T.I Wireless Edge has net cash of US$7.7m. This is fairly high at 20% 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 M.T.I Wireless Edge's P/E Ratio
M.T.I Wireless Edge's P/E is 13.6 which is about average (13.5) in the GB market. With a strong balance sheet combined with recent growth, the P/E implies the market is quite pessimistic. What is very clear is that the market has become more optimistic about M.T.I Wireless Edge over the last month, with the P/E ratio rising from 10.1 back then to 13.6 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than M.T.I Wireless Edge. 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.
