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How Does Primecity Investment's (EPA:ALPCI) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Primecity Investment (EPA:ALPCI) shares have had a really impressive month, gaining 32%, after some slippage. And the full year gain of 34% isn't too shabby, either!

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). 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). 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.

Check out our latest analysis for Primecity Investment

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

Primecity Investment's P/E of 11.75 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (13.2) for companies in the real estate industry is higher than Primecity Investment's P/E.

ENXTPA:ALPCI Price Estimation Relative to Market, February 2nd 2020

Its relatively low P/E ratio indicates that Primecity Investment 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. 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

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.

Primecity Investment saw earnings per share decrease by 62% last year. And over the longer term (5 years) earnings per share have decreased 64% annually. This could justify a pessimistic P/E.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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 Primecity Investment's Debt Impact Its P/E Ratio?

Primecity Investment has net debt equal to 32% of its market cap. While that's enough to warrant consideration, it doesn't really concern us.

The Bottom Line On Primecity Investment's P/E Ratio

Primecity Investment has a P/E of 11.8. That's below the average in the FR market, which is 18.3. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. What is very clear is that the market has become more optimistic about Primecity Investment over the last month, with the P/E ratio rising from 8.9 back then to 11.8 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Primecity Investment may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.