Unfortunately for some shareholders, the PARKEN Sport & Entertainment (CPH:PARKEN) share price has dived 34% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 39% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.
Does PARKEN Sport & Entertainment Have A Relatively High Or Low P/E For Its Industry?
PARKEN Sport & Entertainment's P/E of 11.50 indicates relatively low sentiment towards the stock. The image below shows that PARKEN Sport & Entertainment has a lower P/E than the average (13.8) P/E for companies in the hospitality industry.
Its relatively low P/E ratio indicates that PARKEN Sport & Entertainment shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
PARKEN Sport & Entertainment shrunk earnings per share by 29% over the last year. But over the longer term (5 years) earnings per share have increased by 51%. And over the longer term (3 years) earnings per share have decreased 7.6% annually. This might lead to low expectations.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
How Does PARKEN Sport & Entertainment's Debt Impact Its P/E Ratio?
PARKEN Sport & Entertainment has net debt worth a very significant 192% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Verdict On PARKEN Sport & Entertainment's P/E Ratio
PARKEN Sport & Entertainment trades on a P/E ratio of 11.5, which is fairly close to the DK market average of 12.1. With relatively high debt, and no earnings per share growth over twelve months, the P/E suggests that many have an expectation that company will find some growth. What can be absolutely certain is that the market has become significantly less optimistic about PARKEN Sport & Entertainment over the last month, with the P/E ratio falling from 17.5 back then to 11.5 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.
Investors should be looking to buy stocks that the market is wrong about. 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. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you spot an error that warrants correction, please contact the editor at email@example.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.