Jarvis Securities (LON:JIM) shares have had a really impressive month, gaining 39%, after some slippage. And the full year gain of 12% isn't too shabby, either!
All else being equal, a sharp share price increase should make a stock less 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
Does Jarvis Securities Have A Relatively High Or Low P/E For Its Industry?
Jarvis Securities's P/E of 14.52 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (15.9) for companies in the capital markets industry is higher than Jarvis Securities's P/E.
Its relatively low P/E ratio indicates that Jarvis Securities shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Most would be impressed by Jarvis Securities earnings growth of 13% in the last year. And its annual EPS growth rate over 5 years is 9.5%. So one might expect 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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
How Does Jarvis Securities's Debt Impact Its P/E Ratio?
The extra options and safety that comes with Jarvis Securities's UK£5.3m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Jarvis Securities's P/E Ratio
Jarvis Securities has a P/E of 14.5. That's around the same as the average in the GB market, which is 14.1. Considering its recent growth, alongside its lack of debt, it would appear that the market isn't very excited about the future. What we know for sure is that investors have become more excited about Jarvis Securities recently, since they have pushed its P/E ratio from 10.5 to 14.5 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
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 firstname.lastname@example.org. 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.