In This Article:
Servotronics (NYSEMKT:SVT) shares have retraced a considerable in the last month. The recent drop has obliterated the annual return, with the share price now down 4.7% over that longer period. But shareholders who bought at the right time will be smiling, given that the stock is up 7.7% over the last quarter.
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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Check out our latest analysis for Servotronics
Does Servotronics Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 8.39 that sentiment around Servotronics isn't particularly high. The image below shows that Servotronics has a lower P/E than the average (19.0) P/E for companies in the electrical industry.
Servotronics's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Servotronics's earnings per share fell by 4.6% in the last twelve months. But EPS is up 10% over the last 3 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Servotronics's Balance Sheet
Servotronics's net debt is 9.7% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.