Yahoo Finance How Does Nokian Renkaat Oyj's (HEL:TYRES) P/E Compare To Its Industry, After The Share Price Drop?
Unfortunately for some shareholders, the Nokian Renkaat Oyj (HEL:TYRES) share price has dived 31% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 42% drop over twelve months.
All else being equal, a share price drop should make a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.
View our latest analysis for Nokian Renkaat Oyj
How Does Nokian Renkaat Oyj's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 6.45 that sentiment around Nokian Renkaat Oyj isn't particularly high. The image below shows that Nokian Renkaat Oyj has a lower P/E than the average (7.7) P/E for companies in the auto components industry.
Nokian Renkaat Oyj's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Nokian Renkaat Oyj, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, Nokian Renkaat Oyj grew EPS by a whopping 35% in the last year. And its annual EPS growth rate over 5 years is 13%. I'd therefore be a little surprised if its P/E ratio was not relatively high.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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).
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).
So What Does Nokian Renkaat Oyj's Balance Sheet Tell Us?
Nokian Renkaat Oyj has net cash of €84m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Nokian Renkaat Oyj's P/E Ratio
Nokian Renkaat Oyj's P/E is 6.4 which is below average (15.8) in the FI market. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. One might conclude that the market is a bit pessimistic, given the low P/E ratio. Given Nokian Renkaat Oyj's P/E ratio has declined from 9.4 to 6.4 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Nokian Renkaat Oyj 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 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.
