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Unfortunately for some shareholders, the Prosegur Compañía de Seguridad (BME:PSG) share price has dived 35% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 53% 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). 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 Prosegur Compañía de Seguridad
Does Prosegur Compañía de Seguridad Have A Relatively High Or Low P/E For Its Industry?
Prosegur Compañía de Seguridad has a P/E ratio of 11.93. The image below shows that Prosegur Compañía de Seguridad has a P/E ratio that is roughly in line with the commercial services industry average (12.6).
That indicates that the market expects Prosegur Compañía de Seguridad will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
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.
Prosegur Compañía de Seguridad saw earnings per share decrease by 13% last year. And over the longer term (5 years) earnings per share have decreased 6.3% annually. This could justify a pessimistic P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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).