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Bittium Oyj (HEL:BITTI) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month alone, although it is still down 21% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 21% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. 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 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 Bittium Oyj
How Does Bittium Oyj's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 24.75 that sentiment around Bittium Oyj isn't particularly high. We can see in the image below that the average P/E (54.2) for companies in the software industry is higher than Bittium Oyj's P/E.
Its relatively low P/E ratio indicates that Bittium Oyj 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. You should delve deeper. I like to check if company insiders have been buying or 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. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
In the last year, Bittium Oyj grew EPS like Taylor Swift grew her fan base back in 2010; the 90% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 86% is also impressive. So I'd be surprised if the P/E ratio was not above average.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.