Unfortunately for some shareholders, the Maisons du Monde (EPA:MDM) share price has dived 41% in the last thirty days. And that drop will have no doubt have some shareholders concerned that the 63% share price decline, over the last year, has turned them into bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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.
Does Maisons du Monde Have A Relatively High Or Low P/E For Its Industry?
Maisons du Monde's P/E is 5.86. The image below shows that Maisons du Monde has a P/E ratio that is roughly in line with the specialty retail industry average (6.3).
That indicates that the market expects Maisons du Monde will perform roughly in line with other companies in its industry. So if Maisons du Monde actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
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. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.
Maisons du Monde shrunk earnings per share by 5.3% 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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Maisons du Monde's Balance Sheet
Net debt is 42% of Maisons du Monde's market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Maisons du Monde's P/E Ratio
Maisons du Monde has a P/E of 5.9. That's below the average in the FR market, which is 14.1. With only modest debt, it's likely the lack of EPS growth at least partially explains the pessimism implied by the P/E ratio. What can be absolutely certain is that the market has become more pessimistic about Maisons du Monde over the last month, with the P/E ratio falling from 10.0 back then to 5.9 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.
Investors have an opportunity when market expectations about a stock are wrong. 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: Maisons du Monde 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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