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Unfortunately for some shareholders, the RaySearch Laboratories (STO:RAY B) share price has dived 44% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 47% in that time.
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. 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.
Check out our latest analysis for RaySearch Laboratories
How Does RaySearch Laboratories's P/E Ratio Compare To Its Peers?
RaySearch Laboratories's P/E of 34.97 indicates some degree of optimism towards the stock. The image below shows that RaySearch Laboratories has a higher P/E than the average (31.2) P/E for companies in the healthcare services industry.
Its relatively high P/E ratio indicates that RaySearch Laboratories shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
RaySearch Laboratories shrunk earnings per share by 36% over the last year. And it has shrunk its earnings per share by 3.4% per year over the last five years. This growth rate might warrant a below average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.