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Kellton Tech Solutions (NSE:KELLTONTEC) shareholders are no doubt pleased to see that the share price has bounced 49% in the last month alone, although it is still down 19% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 37% in the last year.
All else being equal, a sharp share price increase should make a stock less 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.
View our latest analysis for Kellton Tech Solutions
How Does Kellton Tech Solutions's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 3.00 that sentiment around Kellton Tech Solutions isn't particularly high. The image below shows that Kellton Tech Solutions has a lower P/E than the average (12.5) P/E for companies in the it industry.
Kellton Tech Solutions'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. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
Kellton Tech Solutions saw earnings per share improve by -8.6% last year. And earnings per share have improved by 54% annually, over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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.