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Unfortunately for some shareholders, the DATAGROUP (ETR:D6H) share price has dived 42% in the last thirty days. Looking back over the last year, the stock has been a solid performer, with a gain of 11%.
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. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for DATAGROUP
Does DATAGROUP Have A Relatively High Or Low P/E For Its Industry?
DATAGROUP has a P/E ratio of 24.43. The image below shows that DATAGROUP has a P/E ratio that is roughly in line with the it industry average (22.9).
DATAGROUP's P/E tells us that market participants think its prospects are roughly in line with its industry. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
DATAGROUP increased earnings per share by 2.5% last year. And its annual EPS growth rate over 5 years is 49%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does DATAGROUP's Debt Impact Its P/E Ratio?
DATAGROUP's net debt is 19% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.