Yahoo Finance How Does Momentum Group's (STO:MMGR B) P/E Compare To Its Industry, After Its Big Share Price Gain?
Momentum Group (STO:MMGR B) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month alone, although it is still down 34% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 22% 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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 Momentum Group
Does Momentum Group Have A Relatively High Or Low P/E For Its Industry?
Momentum Group's P/E of 9.76 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Momentum Group has a lower P/E than the average (12.1) in the trade distributors industry classification.
This suggests that market participants think Momentum Group 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Momentum Group increased earnings per share by 4.0% last year. And it has bolstered its earnings per share by 10.0% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Momentum Group's Balance Sheet
Momentum Group's net debt is 5.1% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On Momentum Group's P/E Ratio
Momentum Group trades on a P/E ratio of 9.8, which is below the SE market average of 15.9. EPS grew over the last twelve months, and debt levels are quite reasonable. If you believe growth will continue - or even increase - then the low P/E may signify opportunity. What is very clear is that the market has become less pessimistic about Momentum Group over the last month, with the P/E ratio rising from 7.4 back then to 9.8 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. 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 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.
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