Kambi Group (STO:KAMBI) shareholders are no doubt pleased to see that the share price has bounced 36% in the last month alone, although it is still down 9.8% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 27% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock 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.
How Does Kambi Group's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 30.06 that there is some investor optimism about Kambi Group. The image below shows that Kambi Group has a higher P/E than the average (13.4) P/E for companies in the hospitality industry.
Its relatively high P/E ratio indicates that Kambi Group shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Kambi Group increased earnings per share by a whopping 28% last year. And earnings per share have improved by 46% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
How Does Kambi Group's Debt Impact Its P/E Ratio?
Kambi Group has net cash of €39m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Bottom Line On Kambi Group's P/E Ratio
Kambi Group has a P/E of 30.1. That's higher than the average in its market, which is 16.6. With cash in the bank the company has plenty of growth options -- and it is already on the right track. So it does not seem strange that the P/E is above average. What is very clear is that the market has become significantly more optimistic about Kambi Group over the last month, with the P/E ratio rising from 22.0 back then to 30.1 today. 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 should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Kambi Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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