How Does Solaria Energía y Medio Ambiente's (BME:SLR) P/E Compare To Its Industry, After Its Big Share Price Gain?
Solaria Energía y Medio Ambiente (BME:SLR) shares have had a really impressive month, gaining 31%, after some slippage. That brought the twelve month gain to a very sharp 91%.
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. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for Solaria Energía y Medio Ambiente
Does Solaria Energía y Medio Ambiente Have A Relatively High Or Low P/E For Its Industry?
Solaria Energía y Medio Ambiente's P/E of 43.35 indicates some degree of optimism towards the stock. The image below shows that Solaria Energía y Medio Ambiente has a higher P/E than the average (31.7) P/E for companies in the renewable energy industry.
Solaria Energía y Medio Ambiente'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 further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Solaria Energía y Medio Ambiente saw earnings per share decrease by 20% last year. But it has grown its earnings per share by 37% per year over the last three 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. 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.
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.
How Does Solaria Energía y Medio Ambiente's Debt Impact Its P/E Ratio?
Solaria Energía y Medio Ambiente has net debt worth 14% of its market capitalization. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.
The Verdict On Solaria Energía y Medio Ambiente's P/E Ratio
Solaria Energía y Medio Ambiente's P/E is 43.3 which is above average (16.6) in its market. With some debt but no EPS growth last year, the market has high expectations of future profits. What we know for sure is that investors have become much more excited about Solaria Energía y Medio Ambiente recently, since they have pushed its P/E ratio from 33.0 to 43.3 over the last month. 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. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Solaria Energía y Medio Ambiente. 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.
