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How Does Cliq Digital's (ETR:CLIQ) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

Unfortunately for some shareholders, the Cliq Digital (ETR:CLIQ) share price has dived 32% in the last thirty days. The bad news is that the recent drop obliterated the last year's worth of gains; the stock is flat over twelve months.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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. 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 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 Cliq Digital

Does Cliq Digital Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 14.56 that sentiment around Cliq Digital isn't particularly high. If you look at the image below, you can see Cliq Digital has a lower P/E than the average (34.9) in the software industry classification.

XTRA:CLIQ Price Estimation Relative to Market, March 15th 2020

Cliq Digital's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Cliq Digital, it's quite possible it could surprise on the upside. 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. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

Cliq Digital shrunk earnings per share by 62% over the last year. But it has grown its earnings per share by 33% per year over the last five years. And over the longer term (3 years) earnings per share have decreased 8.8% annually. This could justify a low P/E.

Remember: P/E Ratios Don't Consider The Balance Sheet

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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).

Cliq Digital's Balance Sheet

Cliq Digital has net debt equal to 43% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Bottom Line On Cliq Digital's P/E Ratio

Cliq Digital trades on a P/E ratio of 14.6, which is below the DE market average of 16.6. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about Cliq Digital over the last month, with the P/E ratio falling from 21.4 back then to 14.6 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.

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 report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Cliq Digital. 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 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.