Yahoo Finanza A Rising Share Price Has Us Looking Closely At Komplett Bank ASA's (OB:KOMP) P/E Ratio
Komplett Bank (OB:KOMP) shareholders are no doubt pleased to see that the share price has bounced 69% in the last month alone, although it is still down 14% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 38% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 Komplett Bank
Does Komplett Bank Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 7.29 that sentiment around Komplett Bank isn't particularly high. We can see in the image below that the average P/E (8.1) for companies in the banks industry is higher than Komplett Bank's P/E.
Its relatively low P/E ratio indicates that Komplett Bank shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Komplett Bank saw earnings per share decrease by 52% last year. And it has shrunk its earnings per share by 5.9% per year over the last three years. This might lead to low expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
So What Does Komplett Bank's Balance Sheet Tell Us?
With net cash of kr619m, Komplett Bank has a very strong balance sheet, which may be important for its business. Having said that, at 49% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On Komplett Bank's P/E Ratio
Komplett Bank's P/E is 7.3 which is below average (11.2) in the NO market. The recent drop in earnings per share would almost certainly temper expectations, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary. What we know for sure is that investors are becoming less uncomfortable about Komplett Bank's prospects, since they have pushed its P/E ratio from 4.3 to 7.3 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Komplett Bank. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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.
