Yahoo Finance A Sliding Share Price Has Us Looking At Games Workshop Group PLC's (LON:GAW) P/E Ratio
To the annoyance of some shareholders, Games Workshop Group (LON:GAW) shares are down a considerable 48% in the last month. The stock has been solid, longer term, gaining 22% in the last year.
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. 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.
See our latest analysis for Games Workshop Group
How Does Games Workshop Group's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 14.51 that there is some investor optimism about Games Workshop Group. The image below shows that Games Workshop Group has a higher P/E than the average (10.5) P/E for companies in the leisure industry.
Games Workshop Group's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors 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.
It's nice to see that Games Workshop Group grew EPS by a stonking 30% in the last year. And earnings per share have improved by 62% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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).
Is Debt Impacting Games Workshop Group's P/E?
The extra options and safety that comes with Games Workshop Group's UK£33m 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 Games Workshop Group's P/E Ratio
Games Workshop Group's P/E is 14.5 which is above average (11.2) in its market. 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). Given Games Workshop Group's P/E ratio has declined from 28.1 to 14.5 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
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.
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.
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