A Rising Share Price Has Us Looking Closely At Swiss Water Decaffeinated Coffee Inc.'s (TSE:SWP) P/E Ratio
Those holding Swiss Water Decaffeinated Coffee (TSE:SWP) shares must be pleased that the share price has rebounded 34% in the last thirty days. But unfortunately, the stock is still down by 44% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 35% 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). 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.
View our latest analysis for Swiss Water Decaffeinated Coffee
Does Swiss Water Decaffeinated Coffee Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 11.14 that sentiment around Swiss Water Decaffeinated Coffee isn't particularly high. If you look at the image below, you can see Swiss Water Decaffeinated Coffee has a lower P/E than the average (13.9) in the food industry classification.
Its relatively low P/E ratio indicates that Swiss Water Decaffeinated Coffee shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Swiss Water Decaffeinated Coffee, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. 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.
Swiss Water Decaffeinated Coffee's earnings per share fell by 35% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 6.3% annually. This could justify a pessimistic P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on 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.
Is Debt Impacting Swiss Water Decaffeinated Coffee's P/E?
Net debt totals 88% of Swiss Water Decaffeinated Coffee's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.
The Bottom Line On Swiss Water Decaffeinated Coffee's P/E Ratio
Swiss Water Decaffeinated Coffee has a P/E of 11.1. That's around the same as the average in the CA market, which is 11.9. With meaningful debt, and no earnings per share growth last year, even an average P/E indicates that the market a significant improvement from the business. What is very clear is that the market has become more optimistic about Swiss Water Decaffeinated Coffee over the last month, with the P/E ratio rising from 8.3 back then to 11.1 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.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Swiss Water Decaffeinated Coffee. So you may wish to see this free collection of other companies that have grown earnings strongly.
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.
