Wi2Wi (CVE:YTY) shares have had a really impressive month, gaining 40%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 42% in the last year.
All else being equal, a sharp share price increase should make a stock less 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 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
How Does Wi2Wi's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 18.06 that sentiment around Wi2Wi isn't particularly high. If you look at the image below, you can see Wi2Wi has a lower P/E than the average (41.6) in the communications industry classification.
This suggests that market participants think Wi2Wi 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
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Wi2Wi's earnings made like a rocket, taking off 228% last year. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Wi2Wi's Balance Sheet
Wi2Wi has net cash of US$1.9m. This is fairly high at 23% 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 Verdict On Wi2Wi's P/E Ratio
Wi2Wi has a P/E of 18.1. That's higher than the average in its market, which is 15.9. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Wi2Wi to have a high P/E ratio. What is very clear is that the market has become significantly more optimistic about Wi2Wi over the last month, with the P/E ratio rising from 12.9 back then to 18.1 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. 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.
But note: Wi2Wi 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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