How Does Questor Technology's (CVE:QST) P/E Compare To Its Industry, After Its Big Share Price Gain?
Questor Technology (CVE:QST) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month alone, although it is still down 65% over the last quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 64% share price decline throughout the year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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). 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 Questor Technology
How Does Questor Technology's P/E Ratio Compare To Its Peers?
Questor Technology's P/E of 6.37 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Questor Technology has a lower P/E than the average (8.8) in the energy services industry classification.
This suggests that market participants think Questor Technology will underperform other companies in its industry. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Questor Technology maintained roughly steady earnings over the last twelve months. But EPS is up 19% over the last 5 years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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.
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 Questor Technology's Debt Impact Its P/E Ratio?
Questor Technology has net cash of CA$13m. This is fairly high at 30% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Questor Technology's P/E Ratio
Questor Technology trades on a P/E ratio of 6.4, which is below the CA market average of 11.7. Earnings improved over the last year. And the net cash position gives the company many options. So it's strange that the low P/E indicates low expectations. What is very clear is that the market has become less pessimistic about Questor Technology over the last month, with the P/E ratio rising from 4.8 back then to 6.4 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Questor Technology. 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).
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.
