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A Sliding Share Price Has Us Looking At New Wave Group AB (publ)'s (STO:NEWA B) P/E Ratio

Simply Wall St

Unfortunately for some shareholders, the New Wave Group (STO:NEWA B) share price has dived 57% in the last thirty days. And that drop will have no doubt have some shareholders concerned that the 60% share price decline, over the last year, has turned them into bagholders. For those wondering, a bagholder is someone who keeps holding a losing stock indefinitely, without taking the time to consider its prospects carefully, going forward.

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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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.

See our latest analysis for New Wave Group

How Does New Wave Group's P/E Ratio Compare To Its Peers?

New Wave Group's P/E of 4.23 indicates relatively low sentiment towards the stock. The image below shows that New Wave Group has a lower P/E than the average (14.3) P/E for companies in the luxury industry.

OM:NEWA B Price Estimation Relative to Market March 27th 2020

New Wave Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with New Wave Group, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.

New Wave Group saw earnings per share improve by 3.3% last year. And its annual EPS growth rate over 5 years is 16%.

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

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.

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 New Wave Group's Debt Impact Its P/E Ratio?

New Wave Group's net debt is considerable, at 136% of its market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Bottom Line On New Wave Group's P/E Ratio

New Wave Group trades on a P/E ratio of 4.2, which is below the SE market average of 14.4. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently. What can be absolutely certain is that the market has become more pessimistic about New Wave Group over the last month, with the P/E ratio falling from 9.9 back then to 4.2 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

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. 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.

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.