Of late the ACM Research (NASDAQ:ACMR) share price has softened like an ice cream in the sun, melting a full 49%. But there's still good reason for shareholders to be content; the stock has gained 11% in the last 90 days. Looking back over the last year, the stock has been a solid performer, with a gain of 42%.
Assuming nothing else has changed, a lower share price makes a stock more 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 long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock 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.
Does ACM Research Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 19.37 that sentiment around ACM Research isn't particularly high. The image below shows that ACM Research has a lower P/E than the average (23.4) P/E for companies in the semiconductor industry.
Its relatively low P/E ratio indicates that ACM Research shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with ACM Research, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
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.
ACM Research's earnings made like a rocket, taking off 104% last year. Unfortunately, earnings per share are down 17% a year, over 5 years.
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. That means it doesn't take debt or cash into account. 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.
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.
Is Debt Impacting ACM Research's P/E?
Since ACM Research holds net cash of US$32m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On ACM Research's P/E Ratio
ACM Research has a P/E of 19.4. That's higher than the average in its market, which is 12.2. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect ACM Research to have a high P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about ACM Research over the last month, with the P/E ratio falling from 37.7 back then to 19.4 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than ACM Research. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.