Unfortunately for some shareholders, the Société Française de Casinos Société Anonyme (EPA:SFCA) share price has dived 30% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 34% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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 long term investors have an opportunity when expectations of a company are too low. 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.
Does Société Française de Casinos Société Anonyme Have A Relatively High Or Low P/E For Its Industry?
Société Française de Casinos Société Anonyme's P/E of 8.74 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Société Française de Casinos Société Anonyme has a lower P/E than the average (22.8) in the hospitality industry classification.
Its relatively low P/E ratio indicates that Société Française de Casinos Société Anonyme shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Société Française de Casinos Société Anonyme, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. 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.
Société Française de Casinos Société Anonyme shrunk earnings per share by 12% over the last year. But it has grown its earnings per share by 8.9% per year over the last five years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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 Société Française de Casinos Société Anonyme's Balance Sheet Tell Us?
Société Française de Casinos Société Anonyme's net debt is 82% of its market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Bottom Line On Société Française de Casinos Société Anonyme's P/E Ratio
Société Française de Casinos Société Anonyme trades on a P/E ratio of 8.7, which is below the FR market average of 16.5. 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 can be absolutely certain is that the market has become more pessimistic about Société Française de Casinos Société Anonyme over the last month, with the P/E ratio falling from 12.5 back then to 8.7 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than Société Française de Casinos Société Anonyme. 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 firstname.lastname@example.org. 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.