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What Is Microequities Asset Management Group's (ASX:MAM) P/E Ratio After Its Share Price Rocketed?

Simply Wall St

Those holding Microequities Asset Management Group (ASX:MAM) shares must be pleased that the share price has rebounded 38% in the last thirty days. But unfortunately, the stock is still down by 49% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 29% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Microequities Asset Management Group

How Does Microequities Asset Management Group's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 11.00 that sentiment around Microequities Asset Management Group isn't particularly high. The image below shows that Microequities Asset Management Group has a lower P/E than the average (14.4) P/E for companies in the capital markets industry.

ASX:MAM Price Estimation Relative to Market May 3rd 2020

This suggests that market participants think Microequities Asset Management Group will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Microequities Asset Management Group's earnings per share fell by 1.2% in the last twelve months. And EPS is down 28% a year, over the last 3 years. So you wouldn't expect a very high P/E.

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

The 'Price' in P/E reflects the market capitalization of the company. 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.

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.

So What Does Microequities Asset Management Group's Balance Sheet Tell Us?

With net cash of AU$4.3m, Microequities Asset Management Group has a very strong balance sheet, which may be important for its business. Having said that, at 11% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Microequities Asset Management Group's P/E Ratio

Microequities Asset Management Group has a P/E of 11.0. That's below the average in the AU market, which is 14.6. The recent drop in earnings per share would almost certainly temper expectations, but the net cash position means the company has time to improve: if so, the low P/E could be an opportunity. What is very clear is that the market has become more optimistic about Microequities Asset Management Group over the last month, with the P/E ratio rising from 8.0 back then to 11.0 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.

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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Microequities Asset Management Group. 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.