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How Does Stillfront Group's (STO:SF) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Stillfront Group (STO:SF) shares have had a really impressive month, gaining 34%, after some slippage. That's tops off a massive gain of 129% in the last year.

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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Stillfront Group

Does Stillfront Group Have A Relatively High Or Low P/E For Its Industry?

Stillfront Group has a P/E ratio of 30.46. You can see in the image below that the average P/E (28.9) for companies in the entertainment industry is roughly the same as Stillfront Group's P/E.

OM:SF Price Estimation Relative to Market, November 30th 2019

Its P/E ratio suggests that Stillfront Group shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Stillfront Group actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. 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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Stillfront Group's earnings made like a rocket, taking off 156% last year. The cherry on top is that the five year growth rate was an impressive 20% per year. With that kind of growth rate we would generally expect a high P/E ratio.

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

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does Stillfront Group's Debt Impact Its P/E Ratio?

Stillfront Group has net debt worth just 7.8% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Bottom Line On Stillfront Group's P/E Ratio

Stillfront Group trades on a P/E ratio of 30.5, which is above its market average of 18.5. Its debt levels do not imperil its balance sheet and its EPS growth is very healthy indeed. So on this analysis a high P/E ratio seems reasonable. What is very clear is that the market has become significantly more optimistic about Stillfront Group over the last month, with the P/E ratio rising from 22.8 back then to 30.5 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.

Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

But note: Stillfront Group 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.