Unfortunately for some shareholders, the BluMetric Environmental (CVE:BLM) share price has dived 38% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 52% drop over twelve months.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.
How Does BluMetric Environmental's P/E Ratio Compare To Its Peers?
BluMetric Environmental's P/E of 2.99 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (19.0) for companies in the commercial services industry is higher than BluMetric Environmental's P/E.
Its relatively low P/E ratio indicates that BluMetric Environmental shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with BluMetric Environmental, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
BluMetric Environmental saw earnings per share decrease by 63% last year. But over the longer term (3 years), earnings per share have increased by 6.9%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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 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.
Is Debt Impacting BluMetric Environmental's P/E?
Net debt totals a substantial 116% of BluMetric Environmental's market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.
The Bottom Line On BluMetric Environmental's P/E Ratio
BluMetric Environmental's P/E is 3.0 which is below average (11.8) in the CA market. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage. What can be absolutely certain is that the market has become more pessimistic about BluMetric Environmental over the last month, with the P/E ratio falling from 4.8 back then to 3.0 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
But note: BluMetric Environmental may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
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