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How Does Cedar Woods Properties's (ASX:CWP) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

Unfortunately for some shareholders, the Cedar Woods Properties (ASX:CWP) share price has dived 35% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 4.0% over that longer period.

Assuming nothing else has changed, a lower share price makes a stock more 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). 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). 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.

View our latest analysis for Cedar Woods Properties

Does Cedar Woods Properties Have A Relatively High Or Low P/E For Its Industry?

Cedar Woods Properties has a P/E ratio of 15.16. You can see in the image below that the average P/E (15.1) for companies in the real estate industry is roughly the same as Cedar Woods Properties's P/E.

ASX:CWP Price Estimation Relative to Market, March 12th 2020

That indicates that the market expects Cedar Woods Properties 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

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Cedar Woods Properties shrunk earnings per share by 60% over the last year. And EPS is down 1.5% a year, over the last 5 years. This could justify a pessimistic P/E.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

Is Debt Impacting Cedar Woods Properties's P/E?

Net debt is 31% of Cedar Woods Properties's market cap. You'd want to be aware of this fact, but it doesn't bother us.

The Verdict On Cedar Woods Properties's P/E Ratio

Cedar Woods Properties has a P/E of 15.2. That's around the same as the average in the AU market, which is 15.9. Given it has some debt, but didn't grow last year, the P/E indicates the market is expecting higher profits ahead for the business. What can be absolutely certain is that the market has become significantly less optimistic about Cedar Woods Properties over the last month, with the P/E ratio falling from 23.2 back then to 15.2 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 have an opportunity when market expectations about a stock are wrong. 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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Cedar Woods Properties 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 editorial-team@simplywallst.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.