Unfortunately for some shareholders, the Allied Motion Technologies (NASDAQ:AMOT) share price has dived 42% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 24% over that longer period.
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. 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.
Does Allied Motion Technologies Have A Relatively High Or Low P/E For Its Industry?
Allied Motion Technologies has a P/E ratio of 14.53. The image below shows that Allied Motion Technologies has a P/E ratio that is roughly in line with the electrical industry average (14.6).
That indicates that the market expects Allied Motion Technologies 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
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. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Allied Motion Technologies increased earnings per share by 5.4% last year. And its annual EPS growth rate over 5 years is 3.6%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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).
How Does Allied Motion Technologies's Debt Impact Its P/E Ratio?
Allied Motion Technologies has net debt equal to 38% of its market cap. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Allied Motion Technologies's P/E Ratio
Allied Motion Technologies has a P/E of 14.5. That's higher than the average in its market, which is 12.6. With modest debt relative to its size, and modest earnings growth, the market is likely expecting sustained long-term growth, if not a near-term improvement. What can be absolutely certain is that the market has become significantly less optimistic about Allied Motion Technologies over the last month, with the P/E ratio falling from 25.0 back then to 14.5 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
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.
You might be able to find a better buy than Allied Motion Technologies. 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).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.