Ibersol S.G.P.S (ELI:IBS) shareholders are no doubt pleased to see that the share price has bounced 73% in the last month alone, although it is still down 19% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 15% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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 deep value investors might steer clear when expectations of a company are too high. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
How Does Ibersol S.G.P.S's P/E Ratio Compare To Its Peers?
Ibersol S.G.P.S's P/E of 12.81 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (14.6) for companies in the hospitality industry is higher than Ibersol S.G.P.S's P/E.
This suggests that market participants think Ibersol S.G.P.S will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. 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.
Ibersol S.G.P.S's earnings per share fell by 30% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 18%. And EPS is down 9.0% a year, over the last 3 years. This might lead to low expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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 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 Ibersol S.G.P.S's Debt Impact Its P/E Ratio?
Net debt is 31% of Ibersol S.G.P.S's market cap. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Ibersol S.G.P.S's P/E Ratio
Ibersol S.G.P.S has a P/E of 12.8. That's higher than the average in its market, which is 10.1. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. What we know for sure is that investors have become much more excited about Ibersol S.G.P.S recently, since they have pushed its P/E ratio from 7.4 to 12.8 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Ibersol S.G.P.S. So you may wish to see this free collection of other companies that have grown earnings strongly.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.