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What Is Globant's (NYSE:GLOB) P/E Ratio After Its Share Price Tanked?

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To the annoyance of some shareholders, Globant (NYSE:GLOB) shares are down a considerable 45% in the last month. Indeed, the recent drop has reduced the annual gain to a relatively sedate 6.0% over the last twelve months.

Assuming nothing else has changed, a lower share price makes a stock more 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, 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for Globant

How Does Globant's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 50.18 that there is some investor optimism about Globant. You can see in the image below that the average P/E (34.6) for companies in the software industry is lower than Globant's P/E.

NYSE:GLOB Price Estimation Relative to Market, March 22nd 2020
NYSE:GLOB Price Estimation Relative to Market, March 22nd 2020

That means that the market expects Globant will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Globant's earnings per share grew by 2.1% in the last twelve months. And earnings per share have improved by 13% annually, 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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).

Is Debt Impacting Globant's P/E?

Since Globant holds net cash of US$31m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Globant's P/E Ratio

Globant's P/E is 50.2 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. Recent earnings growth wasn't bad. Also positive, the relatively strong balance sheet will allow for investment in growth -- and the P/E indicates shareholders that will happen! What can be absolutely certain is that the market has become significantly less optimistic about Globant over the last month, with the P/E ratio falling from 91.3 back then to 50.2 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Globant 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.