A Rising Share Price Has Us Looking Closely At M.T.I Wireless Edge Ltd.'s (LON:MWE) P/E Ratio
It's really great to see that even after a strong run, M.T.I Wireless Edge (LON:MWE) shares have been powering on, with a gain of 31% in the last thirty days. That brought the twelve month gain to a very sharp 100%.
All else being equal, a sharp share price increase should make a stock less 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 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). 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.
See our latest analysis for M.T.I Wireless Edge
Does M.T.I Wireless Edge Have A Relatively High Or Low P/E For Its Industry?
M.T.I Wireless Edge has a P/E ratio of 16.33. The image below shows that M.T.I Wireless Edge has a P/E ratio that is roughly in line with the communications industry average (16.3).
Its P/E ratio suggests that M.T.I Wireless Edge shareholders think that in the future it will perform about the same as other companies in its industry classification. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, M.T.I Wireless Edge grew EPS by a whopping 42% in the last year. And it has bolstered its earnings per share by 22% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
How Does M.T.I Wireless Edge's Debt Impact Its P/E Ratio?
With net cash of US$5.1m, M.T.I Wireless Edge has a very strong balance sheet, which may be important for its business. Having said that, at 12% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.
The Verdict On M.T.I Wireless Edge's P/E Ratio
M.T.I Wireless Edge's P/E is 16.3 which is about average (16.9) in the GB market. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect M.T.I Wireless Edge to have a higher P/E ratio. What we know for sure is that investors have become more excited about M.T.I Wireless Edge recently, since they have pushed its P/E ratio from 12.5 to 16.3 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
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 visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
