Primecity Investment (EPA:ALPCI) shareholders are no doubt pleased to see that the share price has had a great month, posting a 55% gain, recovering from prior weakness. The full year gain of 40% is pretty reasonable, too.
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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 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 Primecity Investment
How Does Primecity Investment's P/E Ratio Compare To Its Peers?
Primecity Investment has a P/E ratio of 11.18. The image below shows that Primecity Investment has a P/E ratio that is roughly in line with the real estate industry average (11.1).
That indicates that the market expects Primecity Investment will perform roughly in line with other companies in its industry. So if Primecity Investment actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. 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.
Primecity Investment's earnings per share fell by 12% in the last twelve months. But EPS is up 7.2% over the last 3 years. And it has shrunk its earnings per share by 14% 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
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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.