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A Sliding Share Price Has Us Looking At Openjobmetis S.p.A.'s (BIT:OJM) P/E Ratio

Simply Wall St

Unfortunately for some shareholders, the Openjobmetis (BIT:OJM) share price has dived 37% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 41% in that time.

All else being equal, a share price drop should make a stock more 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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Openjobmetis

Does Openjobmetis Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 5.30 that sentiment around Openjobmetis isn't particularly high. If you look at the image below, you can see Openjobmetis has a lower P/E than the average (13.4) in the professional services industry classification.

BIT:OJM Price Estimation Relative to Market March 29th 2020

Its relatively low P/E ratio indicates that Openjobmetis 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. You should delve deeper. I like to check if company insiders have been buying or 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Openjobmetis saw earnings per share decrease by 8.2% last year. But it has grown its earnings per share by 34% per year over the last five years.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Openjobmetis's Balance Sheet

Net debt totals 14% of Openjobmetis's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

The Verdict On Openjobmetis's P/E Ratio

Openjobmetis's P/E is 5.3 which is below average (12.5) in the IT market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Openjobmetis's P/E ratio has declined from 8.4 to 5.3 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. 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 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.

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