Unfortunately for some shareholders, the D4t4 Solutions (LON:D4T4) share price has dived 43% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 48% in that time.
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). 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
View our latest analysis for D4t4 Solutions
Does D4t4 Solutions Have A Relatively High Or Low P/E For Its Industry?
D4t4 Solutions's P/E of 14.97 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (19.5) for companies in the it industry is higher than D4t4 Solutions's P/E.
This suggests that market participants think D4t4 Solutions will underperform other companies in its industry. Since the market seems unimpressed with D4t4 Solutions, it's quite possible it could surprise on the upside. 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
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
D4t4 Solutions shrunk earnings per share by 53% over the last year. But it has grown its earnings per share by 33% per year over the last five years. And it has shrunk its earnings per share by 5.4% per year over the last three years. This could justify a low P/E.
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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).