Yahoo Finance How Does Arrow Global Group's (LON:ARW) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, Arrow Global Group (LON:ARW) shares are down a considerable 31% in the last month. The recent drop has obliterated the annual return, with the share price now down 5.5% over that longer period.
Assuming nothing else has changed, a lower share price makes a stock more 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. 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). 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.
View our latest analysis for Arrow Global Group
How Does Arrow Global Group's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 8.25 that sentiment around Arrow Global Group isn't particularly high. If you look at the image below, you can see Arrow Global Group has a lower P/E than the average (9.0) in the consumer finance industry classification.
Its relatively low P/E ratio indicates that Arrow Global Group shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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
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. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Arrow Global Group saw earnings per share decrease by 11% last year. But over the longer term (5 years) earnings per share have increased by 15%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Arrow Global Group's Balance Sheet
Net debt totals a substantial 295% of Arrow Global Group's market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Bottom Line On Arrow Global Group's P/E Ratio
Arrow Global Group has a P/E of 8.3. That's below the average in the GB market, which is 15.1. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. What can be absolutely certain is that the market has become more pessimistic about Arrow Global Group over the last month, with the P/E ratio falling from 11.9 back then to 8.3 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 have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Arrow Global Group. 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.
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