Vitec Software Group (STO:VIT B) shares have continued recent momentum with a 30% gain in the last month alone. Zooming out, the annual gain of 136% knocks our socks off.
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 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.
Does Vitec Software Group Have A Relatively High Or Low P/E For Its Industry?
Vitec Software Group has a P/E ratio of 50.53. You can see in the image below that the average P/E (53.3) for companies in the software industry is roughly the same as Vitec Software Group's P/E.
Vitec Software Group's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Vitec Software Group actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Most would be impressed by Vitec Software Group earnings growth of 17% in the last year. And its annual EPS growth rate over 5 years is 22%. With that performance, you might expect an above average P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Vitec Software Group's Balance Sheet
Vitec Software Group has net debt worth just 7.2% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.
The Verdict On Vitec Software Group's P/E Ratio
Vitec Software Group has a P/E of 50.5. That's higher than the average in its market, which is 18.8. Its debt levels do not imperil its balance sheet and it is growing EPS strongly. So on this analysis it seems reasonable that its P/E ratio is above average. What is very clear is that the market has become significantly more optimistic about Vitec Software Group over the last month, with the P/E ratio rising from 38.8 back then to 50.5 today. 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. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
Of course you might be able to find a better stock than Vitec Software Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
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