What Is Propel Funeral Partners's (ASX:PFP) P/E Ratio After Its Share Price Tanked?
To the annoyance of some shareholders, Propel Funeral Partners (ASX:PFP) shares are down a considerable 37% in the last month. The recent drop has obliterated the annual return, with the share price now down 22% over that longer period.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Check out our latest analysis for Propel Funeral Partners
How Does Propel Funeral Partners's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 24.47 that there is some investor optimism about Propel Funeral Partners. The image below shows that Propel Funeral Partners has a higher P/E than the average (14.5) P/E for companies in the consumer services industry.
That means that the market expects Propel Funeral Partners will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Propel Funeral Partners shrunk earnings per share by 21% over the last year. And over the longer term (3 years) earnings per share have decreased 5.3% annually. This might lead to low expectations.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
How Does Propel Funeral Partners's Debt Impact Its P/E Ratio?
Propel Funeral Partners's net debt equates to 28% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Propel Funeral Partners's P/E Ratio
Propel Funeral Partners's P/E is 24.5 which is above average (13.0) in its market. With some debt but no EPS growth last year, the market has high expectations of future profits. Given Propel Funeral Partners's P/E ratio has declined from 38.7 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 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. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Propel Funeral Partners. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
