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To the annoyance of some shareholders, ELES Semiconductor Equipment (BIT:ELES) shares are down a considerable 35% in the last month. Zooming out, the recent drop wiped out a year's worth of gains, with the share price now back where it was a year ago.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
View our latest analysis for ELES Semiconductor Equipment
Does ELES Semiconductor Equipment Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 9.81 that sentiment around ELES Semiconductor Equipment isn't particularly high. We can see in the image below that the average P/E (25.1) for companies in the semiconductor industry is higher than ELES Semiconductor Equipment's P/E.
Its relatively low P/E ratio indicates that ELES Semiconductor Equipment shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with ELES Semiconductor Equipment, 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
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's nice to see that ELES Semiconductor Equipment grew EPS by a stonking 37% in the last year. And it has bolstered its earnings per share by 28% per year over the last five years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.