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How Does UMT United Mobility Technology's (ETR:UMDK) P/E Compare To Its Industry, After The Share Price Drop?

Simply Wall St

Unfortunately for some shareholders, the UMT United Mobility Technology (ETR:UMDK) share price has dived 40% in the last thirty days. Given the 69% drop over the last year, some shareholders might be worried that they have become bagholders. For those wondering, a bagholder is someone who keeps holding a losing stock indefinitely, without taking the time to consider its prospects carefully, going forward.

Assuming nothing else has changed, a lower share price makes a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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 UMT United Mobility Technology

Does UMT United Mobility Technology Have A Relatively High Or Low P/E For Its Industry?

UMT United Mobility Technology's P/E of 5.27 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (37.4) for companies in the software industry is higher than UMT United Mobility Technology's P/E.

XTRA:UMDK Price Estimation Relative to Market March 26th 2020

Its relatively low P/E ratio indicates that UMT United Mobility Technology shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with UMT United Mobility Technology, 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.

UMT United Mobility Technology's earnings per share grew by 8.4% in the last twelve months. And earnings per share have improved by 29% annually, over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

So What Does UMT United Mobility Technology's Balance Sheet Tell Us?

With net cash of €1.1m, UMT United Mobility Technology has a very strong balance sheet, which may be important for its business. Having said that, at 31% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Bottom Line On UMT United Mobility Technology's P/E Ratio

UMT United Mobility Technology trades on a P/E ratio of 5.3, which is below the DE market average of 16.8. Recent earnings growth wasn't bad. Also positive, the relatively strong balance sheet will allow for investment in growth. In contrast, the P/E indicates shareholders doubt that will happen! Given analysts are expecting further growth, one might have expected a higher P/E ratio. That may be worth further research. What can be absolutely certain is that the market has become more pessimistic about UMT United Mobility Technology over the last month, with the P/E ratio falling from 8.9 back then to 5.3 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than UMT United Mobility 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.