To the annoyance of some shareholders, Maison Internationale de l'InformatiqueS (EPA:ALMII) shares are down a considerable 38% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 45% drop over twelve months.
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 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.
Does Maison Internationale de l'InformatiqueS Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 4.56 that sentiment around Maison Internationale de l'InformatiqueS isn't particularly high. If you look at the image below, you can see Maison Internationale de l'InformatiqueS has a lower P/E than the average (13.1) in the consumer services industry classification.
Maison Internationale de l'InformatiqueS's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Maison Internationale de l'InformatiqueS, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Maison Internationale de l'InformatiqueS increased earnings per share by a whopping 45% last year.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Maison Internationale de l'InformatiqueS's Balance Sheet
Maison Internationale de l'InformatiqueS has net cash of €4.6m. This is fairly high at 30% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Maison Internationale de l'InformatiqueS's P/E Ratio
Maison Internationale de l'InformatiqueS's P/E is 4.6 which is below average (13.6) in the FR market. Not only should the net cash position reduce risk, but the recent growth has been impressive. The below average P/E ratio suggests that market participants don't believe the strong growth will continue. Given Maison Internationale de l'InformatiqueS's P/E ratio has declined from 7.4 to 4.6 in the last month, we know for sure that the market is more worried about the business today, than it was back then. 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.
Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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.
But note: Maison Internationale de l'InformatiqueS 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 email@example.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.
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