Yahoo Finance A Sliding Share Price Has Us Looking At Finsbury Food Group Plc's (LON:FIF) P/E Ratio
To the annoyance of some shareholders, Finsbury Food Group (LON:FIF) shares are down a considerable 31% in the last month. The bad news is that the recent drop obliterated the last year's worth of gains; the stock is flat 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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 Finsbury Food Group
How Does Finsbury Food Group's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 9.08 that sentiment around Finsbury Food Group isn't particularly high. If you look at the image below, you can see Finsbury Food Group has a lower P/E than the average (12.2) in the food industry classification.
Finsbury Food Group'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 Finsbury Food Group, it's quite possible it could surprise on the upside. 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
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Finsbury Food Group saw earnings per share improve by -6.2% last year. And its annual EPS growth rate over 5 years is 4.6%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does Finsbury Food Group's Debt Impact Its P/E Ratio?
Finsbury Food Group has net debt equal to 35% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Finsbury Food Group's P/E Ratio
Finsbury Food Group trades on a P/E ratio of 9.1, which is below the GB market average of 13.9. The company does have a little debt, and EPS is moving in the right direction. If growth is sustainable over the long term, then the current P/E ratio may be a sign of good value. What can be absolutely certain is that the market has become more pessimistic about Finsbury Food Group over the last month, with the P/E ratio falling from 13.1 back then to 9.1 today. 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.
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.
But note: Finsbury Food Group 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.
