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What Is Go-Ahead Group's (LON:GOG) P/E Ratio After Its Share Price Rocketed?

Those holding Go-Ahead Group (LON:GOG) shares must be pleased that the share price has rebounded 154% in the last thirty days. But unfortunately, the stock is still down by 43% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 35% in the last year.

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. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for Go-Ahead Group

How Does Go-Ahead Group's P/E Ratio Compare To Its Peers?

Go-Ahead Group has a P/E ratio of 8.56. As you can see below Go-Ahead Group has a P/E ratio that is fairly close for the average for the transportation industry, which is 8.5.

LSE:GOG Price Estimation Relative to Market April 18th 2020
LSE:GOG Price Estimation Relative to Market April 18th 2020

Its P/E ratio suggests that Go-Ahead Group shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Go-Ahead Group actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. 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.

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Go-Ahead Group's earnings per share fell by 7.9% in the last twelve months. And EPS is down 2.2% a year, over the last 5 years. So we might expect a relatively low P/E.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. 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 Go-Ahead Group's Balance Sheet Tell Us?

With net cash of UK£215m, Go-Ahead Group has a very strong balance sheet, which may be important for its business. Having said that, at 41% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Go-Ahead Group's P/E Ratio

Go-Ahead Group trades on a P/E ratio of 8.6, which is below the GB market average of 13.5. Falling earnings per share are likely to be keeping potential buyers away, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity. What is very clear is that the market has become significantly less pessimistic about Go-Ahead Group over the last month, with the P/E ratio rising from 3.4 back then to 8.6 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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 find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.