Unfortunately for some shareholders, the IBU-tec advanced materials (ETR:IBU) share price has dived 40% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 54% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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.
Does IBU-tec advanced materials Have A Relatively High Or Low P/E For Its Industry?
IBU-tec advanced materials's P/E of 38.08 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (14.3) for companies in the chemicals industry is lower than IBU-tec advanced materials's P/E.
IBU-tec advanced materials's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and 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. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
IBU-tec advanced materials shrunk earnings per share by 54% over the last year. And it has shrunk its earnings per share by 18% per year over the last five years. This might lead to muted expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.
How Does IBU-tec advanced materials's Debt Impact Its P/E Ratio?
IBU-tec advanced materials's net debt equates to 44% of its market capitalization. While it's worth keeping this in mind, it isn't a worry.
The Verdict On IBU-tec advanced materials's P/E Ratio
IBU-tec advanced materials trades on a P/E ratio of 38.1, which is above its market average of 16.8. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. Given IBU-tec advanced materials's P/E ratio has declined from 63.7 to 38.1 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 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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: IBU-tec advanced materials may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you spot an error that warrants correction, please contact the editor at email@example.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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