It's great to see PaperpackE.E (ATH:PPAK) shareholders have their patience rewarded with a 31% share price pop in the last month. That brought the twelve month gain to a very sharp 57%.
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.
View our latest analysis for PaperpackE.E
How Does PaperpackE.E's P/E Ratio Compare To Its Peers?
PaperpackE.E's P/E of 13.53 indicates relatively low sentiment towards the stock. The image below shows that PaperpackE.E has a lower P/E than the average (15.7) P/E for companies in the packaging industry.
Its relatively low P/E ratio indicates that PaperpackE.E shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with PaperpackE.E, it's quite possible it could surprise on the upside. 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
PaperpackE.E saw earnings per share improve by -4.4% last year. And earnings per share have improved by 11% annually, over the last five years.
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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
PaperpackE.E's Balance Sheet
PaperpackE.E has net debt worth just 6.9% of its market capitalization. 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.