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A Rising Share Price Has Us Looking Closely At Allied Motion Technologies Inc.'s (NASDAQ:AMOT) P/E Ratio

Simply Wall St

Allied Motion Technologies (NASDAQ:AMOT) shares have had a really impressive month, gaining 31%, after some slippage. The bad news is that even after that recovery shareholders are still underwater by about 3.0% for the full year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Allied Motion Technologies

How Does Allied Motion Technologies's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 26.23 that there is some investor optimism about Allied Motion Technologies. As you can see below, Allied Motion Technologies has a higher P/E than the average company (16.6) in the electrical industry.

NasdaqGM:AMOT Price Estimation Relative to Market, November 2nd 2019

That means that the market expects Allied Motion Technologies will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

It's great to see that Allied Motion Technologies grew EPS by 19% in the last year. And it has bolstered its earnings per share by 8.8% per year over the last five years. With that performance, you might expect an above average P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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 Allied Motion Technologies's Debt Impact Its P/E Ratio?

Allied Motion Technologies has net debt worth 24% of its market capitalization. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Bottom Line On Allied Motion Technologies's P/E Ratio

Allied Motion Technologies has a P/E of 26.2. That's higher than the average in its market, which is 18.0. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. Therefore, it's not particularly surprising that it has a above average P/E ratio. What we know for sure is that investors have become much more excited about Allied Motion Technologies recently, since they have pushed its P/E ratio from 20.0 to 26.2 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 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.

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.

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. Thank you for reading.