Yahoo Finance A Rising Share Price Has Us Looking Closely At Bittium Oyj's (HEL:BITTI) P/E Ratio
Bittium Oyj (HEL:BITTI) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month alone, although it is still down 21% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 21% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). 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 Bittium Oyj
How Does Bittium Oyj's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 24.75 that sentiment around Bittium Oyj isn't particularly high. We can see in the image below that the average P/E (54.2) for companies in the software industry is higher than Bittium Oyj's P/E.
Its relatively low P/E ratio indicates that Bittium Oyj shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or 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. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, Bittium Oyj grew EPS like Taylor Swift grew her fan base back in 2010; the 90% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 86% is also impressive. So I'd be surprised if the P/E ratio was not above average.
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. That means it doesn't take debt or cash into account. 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.
So What Does Bittium Oyj's Balance Sheet Tell Us?
The extra options and safety that comes with Bittium Oyj's €15m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Bittium Oyj's P/E Ratio
Bittium Oyj has a P/E of 24.7. That's higher than the average in its market, which is 18.2. Its net cash position is the cherry on top of its superb EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). What we know for sure is that investors have become much more excited about Bittium Oyj recently, since they have pushed its P/E ratio from 19.0 to 24.7 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
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.
