In This Article:
Volex (LON:VLX) shares have continued recent momentum with a 31% gain in the last month alone. That brought the twelve month gain to a very sharp 58%.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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 deep value investors might steer clear when expectations of a company are too high. 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.
See our latest analysis for Volex
Does Volex Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 18.82 that sentiment around Volex isn't particularly high. We can see in the image below that the average P/E (20.4) for companies in the electrical industry is higher than Volex's P/E.
Its relatively low P/E ratio indicates that Volex shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Volex's 165% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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).
How Does Volex's Debt Impact Its P/E Ratio?
Volex has net cash of US$7.9m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.