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How Does Perseus's (ATH:PERS) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Perseus (ATH:PERS) shares have had a really impressive month, gaining 38%, after some slippage. And the full year gain of 39% isn't too shabby, either!

All else being equal, a sharp share price increase should make a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

See our latest analysis for Perseus

Does Perseus Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 10.79 that sentiment around Perseus isn't particularly high. The image below shows that Perseus has a lower P/E than the average (21.7) P/E for companies in the food industry.

ATSE:PERS Price Estimation Relative to Market, December 21st 2019

Perseus's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Perseus, 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Perseus's earnings per share fell by 15% in the last twelve months. But EPS is up 36% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 3.0% annually. This could justify a low P/E.

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

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

So What Does Perseus's Balance Sheet Tell Us?

Perseus's net debt is 56% of its market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On Perseus's P/E Ratio

Perseus's P/E is 10.8 which is below average (16.1) in the GR market. Given meaningful debt, and a lack of recent growth, the market looks to be extrapolating this recent performance; reflecting low expectations for the future. What is very clear is that the market has become more optimistic about Perseus over the last month, with the P/E ratio rising from 7.8 back then to 10.8 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. 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 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 be able to find a better stock than Perseus. 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 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.