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A Rising Share Price Has Us Looking Closely At Emova Group SA's (EPA:ALEMV) P/E Ratio

Simply Wall St

Those holding Emova Group (EPA:ALEMV) shares must be pleased that the share price has rebounded 47% in the last thirty days. But unfortunately, the stock is still down by 21% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 32% in the last year.

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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 Emova Group

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

Emova Group's P/E of 8.97 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Emova Group has a lower P/E than the average (13.1) in the specialty retail industry classification.

ENXTPA:ALEMV Price Estimation Relative to Market, January 16th 2020

Its relatively low P/E ratio indicates that Emova Group shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Emova Group's earnings made like a rocket, taking off 148% last year. Having said that, the average EPS growth over the last three years wasn't so good, coming in at 8.6%. Regrettably, the longer term performance is poor, with EPS down 30% per year over 5 years.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. 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.

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.

So What Does Emova Group's Balance Sheet Tell Us?

Net debt totals 74% of Emova Group's market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Verdict On Emova Group's P/E Ratio

Emova Group trades on a P/E ratio of 9.0, which is below the FR market average of 18.0. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What is very clear is that the market has become less pessimistic about Emova Group over the last month, with the P/E ratio rising from 6.1 back then to 9.0 today. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

You might be able to find a better buy than Emova 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.