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Unfortunately for some shareholders, the Wi2Wi (CVE:YTY) share price has dived 31% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 48% 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 Wi2Wi
Does Wi2Wi Have A Relatively High Or Low P/E For Its Industry?
Wi2Wi's P/E is 22.94. You can see in the image below that the average P/E (22.9) for companies in the communications industry is roughly the same as Wi2Wi's P/E.
That indicates that the market expects Wi2Wi will perform roughly in line with other companies in 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
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
In the last year, Wi2Wi grew EPS like Taylor Swift grew her fan base back in 2010; the 91% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.
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.
Wi2Wi's Balance Sheet
Wi2Wi has net cash of US$1.5m. This is fairly high at 24% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.