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To the annoyance of some shareholders, ChemoMetec (CPH:CHEMM) shares are down a considerable 36% in the last month. Looking back over the last year, the stock has been a solid performer, with a gain of 27%.
All else being equal, a share price drop should make a stock more 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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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 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 ChemoMetec
Does ChemoMetec Have A Relatively High Or Low P/E For Its Industry?
ChemoMetec's P/E of 61.06 indicates some degree of optimism towards the stock. The image below shows that ChemoMetec has a higher P/E than the average (44.7) P/E for companies in the life sciences industry.
Its relatively high P/E ratio indicates that ChemoMetec shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
ChemoMetec increased earnings per share by a whopping 41% last year. And it has bolstered its earnings per share by 77% per year over the last five years. So we'd generally expect it to have a relatively high P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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.