It's really great to see that even after a strong run, Wallenius Wilhelmsen (OB:WALWIL) shares have been powering on, with a gain of 31% in the last thirty days. But that gain wasn't enough to make shareholders whole, as the share price is still down 5.7% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. 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 Wallenius Wilhelmsen Have A Relatively High Or Low P/E For Its Industry?
Wallenius Wilhelmsen's P/E of 14.18 indicates some degree of optimism towards the stock. As you can see below, Wallenius Wilhelmsen has a higher P/E than the average company (12.6) in the shipping industry.
That means that the market expects Wallenius Wilhelmsen 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
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Wallenius Wilhelmsen increased earnings per share by 3.2% last year. But earnings per share are down 23% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Wallenius Wilhelmsen's Debt Impact Its P/E Ratio?
Wallenius Wilhelmsen's net debt is considerable, at 109% of its market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.
The Verdict On Wallenius Wilhelmsen's P/E Ratio
Wallenius Wilhelmsen's P/E is 14.2 which is about average (14.2) in the NO market. It has significant debt, though the market seems to take confidence from recent earnings growth. What is very clear is that the market has become more optimistic about Wallenius Wilhelmsen over the last month, with the P/E ratio rising from 10.8 back then to 14.2 today. 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. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Wallenius Wilhelmsen may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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