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Unfortunately for some shareholders, the Star Entertainment Group (ASX:SGR) share price has dived 36% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 37% drop over twelve months.
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 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.
View our latest analysis for Star Entertainment Group
Does Star Entertainment Group Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 19.71 that sentiment around Star Entertainment Group isn't particularly high. If you look at the image below, you can see Star Entertainment Group has a lower P/E than the average (23.3) in the hospitality industry classification.
Star Entertainment Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Star Entertainment Group, 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
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Star Entertainment Group shrunk earnings per share by 54% over the last year. And it has shrunk its earnings per share by 6.4% per year over the last five years. This growth rate might warrant a below average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).