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What Is Orocobre's (ASX:ORE) P/E Ratio After Its Share Price Tanked?

Simply Wall St

Unfortunately for some shareholders, the Orocobre (ASX:ORE) share price has dived 34% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 31% in that time.

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). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock 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 Orocobre

Does Orocobre Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 24.46 that there is some investor optimism about Orocobre. You can see in the image below that the average P/E (10.0) for companies in the metals and mining industry is lower than Orocobre's P/E.

ASX:ORE Price Estimation Relative to Market, March 12th 2020
ASX:ORE Price Estimation Relative to Market, March 12th 2020

Orocobre's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Orocobre shrunk earnings per share by 13% over the last year. But EPS is up 27% over the last 3 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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

So What Does Orocobre's Balance Sheet Tell Us?

Since Orocobre holds net cash of US$11m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Orocobre's P/E Ratio

Orocobre's P/E is 24.5 which is above average (16.2) in its market. The recent drop in earnings per share would make some investors cautious, but the healthy balance sheet means the company retains the potential for future growth. If this growth fails to materialise, the current high P/E could prove to be temporary, as the share price falls. Given Orocobre's P/E ratio has declined from 37.0 to 24.5 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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 Orocobre. 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.