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A Sliding Share Price Has Us Looking At Hypoport AG's (ETR:HYQ) P/E Ratio

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Simply Wall St
·4 min read
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To the annoyance of some shareholders, Hypoport (ETR:HYQ) shares are down a considerable 35% in the last month. The stock has been solid, longer term, gaining 37% in the last year.

All else being equal, a share price drop should make a stock more 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 long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

Check out our latest analysis for Hypoport

How Does Hypoport's P/E Ratio Compare To Its Peers?

Hypoport's P/E of 59.47 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (8.6) for companies in the diversified financial industry is a lot lower than Hypoport's P/E.

XTRA:HYQ Price Estimation Relative to Market, March 17th 2020
XTRA:HYQ Price Estimation Relative to Market, March 17th 2020

That means that the market expects Hypoport will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. 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 Hypoport earnings growth of 16% in the last year. And earnings per share have improved by 41% annually, over the last five years. This could arguably justify a relatively high P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

Hypoport's Balance Sheet

Net debt totals just 5.2% of Hypoport's market cap. 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 Hypoport's P/E Ratio

With a P/E ratio of 59.5, Hypoport is expected to grow earnings very strongly in the years to come. While the company does use modest debt, its recent earnings growth is very good. Therefore, it's not particularly surprising that it has a above average P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about Hypoport over the last month, with the P/E ratio falling from 92.0 back then to 59.5 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: Hypoport 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 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.