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How Does Fountaine Pajot's (EPA:ALFPC) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

To the annoyance of some shareholders, Fountaine Pajot (EPA:ALFPC) shares are down a considerable 46% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 41% drop over twelve months.

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. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Fountaine Pajot

How Does Fountaine Pajot's P/E Ratio Compare To Its Peers?

Fountaine Pajot's P/E of 8.54 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Fountaine Pajot has a lower P/E than the average (9.4) in the leisure industry classification.

ENXTPA:ALFPC Price Estimation Relative to Market, March 21st 2020

Its relatively low P/E ratio indicates that Fountaine Pajot shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Fountaine Pajot, 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

Fountaine Pajot saw earnings per share improve by 6.9% last year. And it has bolstered its earnings per share by 42% per year over the last five years.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Fountaine Pajot's Balance Sheet Tell Us?

The extra options and safety that comes with Fountaine Pajot's €8.2m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On Fountaine Pajot's P/E Ratio

Fountaine Pajot has a P/E of 8.5. That's below the average in the FR market, which is 13.2. 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 analysts are expecting further growth, one might have expected a higher P/E ratio. That may be worth further research. Given Fountaine Pajot's P/E ratio has declined from 15.8 to 8.5 in the last month, we know for sure that the market is more worried 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 deep value investors this stock might justify some research.

Investors have an opportunity when market expectations about a stock are wrong. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: Fountaine Pajot 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.