Unfortunately for some shareholders, the Ahlstrom-Munksjö Oyj (HEL:AM1) share price has dived 34% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 28% 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. 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 Ahlstrom-Munksjö Oyj
Does Ahlstrom-Munksjö Oyj Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 37.19 that there is some investor optimism about Ahlstrom-Munksjö Oyj. As you can see below, Ahlstrom-Munksjö Oyj has a much higher P/E than the average company (9.4) in the forestry industry.
Ahlstrom-Munksjö Oyj'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 always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Ahlstrom-Munksjö Oyj shrunk earnings per share by 36% over the last year. But EPS is up 15% over the last 5 years. And EPS is down 31% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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.
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 Ahlstrom-Munksjö Oyj's Balance Sheet Tell Us?
Net debt totals 65% of Ahlstrom-Munksjö Oyj's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.