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What Is SinterCast's (STO:SINT) P/E Ratio After Its Share Price Rocketed?

Those holding SinterCast (STO:SINT) shares must be pleased that the share price has rebounded 33% in the last thirty days. But unfortunately, the stock is still down by 36% over a quarter. While recent buyers might be laughing, long term holders might not be so pleased, since the recent gain only brings the full year return to evens.

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. 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.

Check out our latest analysis for SinterCast

Does SinterCast Have A Relatively High Or Low P/E For Its Industry?

SinterCast's P/E of 19.80 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (16.3) for companies in the machinery industry is lower than SinterCast's P/E.

OM:SINT Price Estimation Relative to Market April 20th 2020
OM:SINT Price Estimation Relative to Market April 20th 2020

SinterCast's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

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SinterCast increased earnings per share by a whopping 47% last year. And earnings per share have improved by 31% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.

So What Does SinterCast's Balance Sheet Tell Us?

Since SinterCast holds net cash of kr33m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On SinterCast's P/E Ratio

SinterCast has a P/E of 19.8. That's higher than the average in its market, which is 15.7. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect SinterCast to have a high P/E ratio. What is very clear is that the market has become more optimistic about SinterCast over the last month, with the P/E ratio rising from 14.9 back then to 19.8 today. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: SinterCast 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.