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How Does HITECHPROS Société anonyme's (EPA:ALHIT) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

HITECHPROS Société anonyme (EPA:ALHIT) shares have had a really impressive month, gaining 37%, after some slippage. While recent buyers might be laughing, long term holders might not be so pleased, since the recent gain only brings the full year return to evens.

Assuming no other changes, a sharply higher share price makes a stock less 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 deep value investors might steer clear when expectations of a company are too high. 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.

See our latest analysis for HITECHPROS Société anonyme

How Does HITECHPROS Société anonyme's P/E Ratio Compare To Its Peers?

HITECHPROS Société anonyme's P/E of 12.54 indicates relatively low sentiment towards the stock. The image below shows that HITECHPROS Société anonyme has a lower P/E than the average (14.0) P/E for companies in the it industry.

ENXTPA:ALHIT Price Estimation Relative to Market May 2nd 2020

This suggests that market participants think HITECHPROS Société anonyme will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.

HITECHPROS Société anonyme saw earnings per share improve by 5.0% last year. And its annual EPS growth rate over 5 years is 16%.

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

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).

How Does HITECHPROS Société anonyme's Debt Impact Its P/E Ratio?

With net cash of €6.4m, HITECHPROS Société anonyme has a very strong balance sheet, which may be important for its business. Having said that, at 24% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On HITECHPROS Société anonyme's P/E Ratio

HITECHPROS Société anonyme has a P/E of 12.5. That's below the average in the FR market, which is 14.4. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth. In contrast, the P/E indicates shareholders doubt that will happen! What we know for sure is that investors have become more excited about HITECHPROS Société anonyme recently, since they have pushed its P/E ratio from 9.2 to 12.5 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

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. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

You might be able to find a better buy than HITECHPROS Société anonyme. 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.