To the annoyance of some shareholders, Marshall Motor Holdings (LON:MMH) shares are down a considerable 43% in the last month. That drop has capped off a tough year for shareholders, with the share price down 48% in that time.
Assuming nothing else has changed, a lower share price makes a stock more 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 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
How Does Marshall Motor Holdings's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 4.51 that sentiment around Marshall Motor Holdings isn't particularly high. We can see in the image below that the average P/E (7.1) for companies in the specialty retail industry is higher than Marshall Motor Holdings's P/E.
This suggests that market participants think Marshall Motor Holdings will underperform other companies in its industry. Since the market seems unimpressed with Marshall Motor Holdings, 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Marshall Motor Holdings increased earnings per share by an impressive 11% over the last twelve months. And it has improved its earnings per share by 3.2% per year over the last three years. With that performance, you might expect an above average P/E ratio. Unfortunately, earnings per share are down 41% a year, over 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
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).
Marshall Motor Holdings's Balance Sheet
Marshall Motor Holdings's net debt equates to 43% of its market capitalization. While that's enough to warrant consideration, it doesn't really concern us.
The Bottom Line On Marshall Motor Holdings's P/E Ratio
Marshall Motor Holdings trades on a P/E ratio of 4.5, which is below the GB market average of 11.1. The EPS growth last year was strong, and debt levels are quite reasonable. If it continues to grow, then the current low P/E may prove to be unjustified. What can be absolutely certain is that the market has become more pessimistic about Marshall Motor Holdings over the last month, with the P/E ratio falling from 7.9 back then to 4.5 today. 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.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Marshall Motor Holdings. 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 firstname.lastname@example.org. 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.