Unfortunately for some shareholders, the ÅF Pöyry (STO:AF B) share price has dived 33% in the last thirty days. The bad news is that the recent drop obliterated the last year's worth of gains; the stock is flat over twelve months.
Assuming nothing else has changed, a lower share price makes a stock more 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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.
See our latest analysis for ÅF Pöyry
Does ÅF Pöyry Have A Relatively High Or Low P/E For Its Industry?
ÅF Pöyry's P/E is 20.81. As you can see below ÅF Pöyry has a P/E ratio that is fairly close for the average for the professional services industry, which is 20.8.
That indicates that the market expects ÅF Pöyry will perform roughly in line with other companies in its industry. So if ÅF Pöyry actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
ÅF Pöyry shrunk earnings per share by 27% over the last year. But it has grown its earnings per share by 2.4% per year over the last five years. And EPS is down 4.7% a year, over the last 3 years. This might lead to low expectations.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.