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How Does Fiducian Group's (ASX:FID) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

Unfortunately for some shareholders, the Fiducian Group (ASX:FID) share price has dived 31% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 17% in the last year.

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.

See our latest analysis for Fiducian Group

How Does Fiducian Group's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 12.07 that sentiment around Fiducian Group isn't particularly high. If you look at the image below, you can see Fiducian Group has a lower P/E than the average (15.7) in the capital markets industry classification.

ASX:FID Price Estimation Relative to Market, March 18th 2020

Its relatively low P/E ratio indicates that Fiducian Group shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Fiducian Group increased earnings per share by 8.2% last year. And earnings per share have improved by 21% annually, over the last five years.

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

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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).

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.

Fiducian Group's Balance Sheet

Since Fiducian Group holds net cash of AU$13m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Fiducian Group's P/E Ratio

Fiducian Group has a P/E of 12.1. That's below the average in the AU market, which is 13.9. EPS was up modestly better over the last twelve months. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders don't think it will. Given Fiducian Group's P/E ratio has declined from 17.6 to 12.1 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. 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. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Fiducian Group. 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 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.