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How Does Prodigy Ventures's (CVE:PGV) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Prodigy Ventures (CVE:PGV) shares have had a really impressive month, gaining 46%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 20% in the last year.

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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.

View our latest analysis for Prodigy Ventures

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

We can tell from its P/E ratio of 66.36 that there is some investor optimism about Prodigy Ventures. The image below shows that Prodigy Ventures has a higher P/E than the average (33.8) P/E for companies in the it industry.

TSXV:PGV Price Estimation Relative to Market, September 20th 2019

Prodigy Ventures's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

Prodigy Ventures's earnings made like a rocket, taking off 71% last year. Regrettably, the longer term performance is poor, with EPS down per year over 3 years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Prodigy Ventures's Debt Impact Its P/E Ratio?

The extra options and safety that comes with Prodigy Ventures's CA$1.9m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Bottom Line On Prodigy Ventures's P/E Ratio

With a P/E ratio of 66.4, Prodigy Ventures is expected to grow earnings very strongly in the years to come. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). What we know for sure is that investors have become much more excited about Prodigy Ventures recently, since they have pushed its P/E ratio from 45.5 to 66.4 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

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. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Prodigy Ventures. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.

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. Thank you for reading.