Unfortunately for some shareholders, the Schaffner Holding (VTX:SAHN) share price has dived 31% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 42% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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.
Check out our latest analysis for Schaffner Holding
Does Schaffner Holding Have A Relatively High Or Low P/E For Its Industry?
Schaffner Holding's P/E of 11.62 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (18.5) for companies in the electronic industry is higher than Schaffner Holding's P/E.
This suggests that market participants think Schaffner Holding will underperform other companies in its industry. Since the market seems unimpressed with Schaffner Holding, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or 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 unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Schaffner Holding saw earnings per share decrease by 23% last year. But over the longer term (3 years), earnings per share have increased by 240%. And over the longer term (5 years) earnings per share have decreased 11% annually. This growth rate might warrant a below average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.