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Unfortunately for some shareholders, the Atrium Ljungberg (STO:ATRLJ B) share price has dived 41% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 18% in the last year.
Assuming nothing else has changed, a lower share price makes a stock more 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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 Atrium Ljungberg
Does Atrium Ljungberg Have A Relatively High Or Low P/E For Its Industry?
Atrium Ljungberg's P/E of 6.21 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Atrium Ljungberg has a lower P/E than the average (7.1) in the real estate industry classification.
Its relatively low P/E ratio indicates that Atrium Ljungberg 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. 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
P/E ratios primarily reflect market expectations around earnings growth rates. 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.
Atrium Ljungberg saw earnings per share decrease by 17% last year. But over the longer term (5 years) earnings per share have increased by 35%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. 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.