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A Sliding Share Price Has Us Looking At Vetoquinol SA's (EPA:VETO) P/E Ratio

To the annoyance of some shareholders, Vetoquinol (EPA:VETO) shares are down a considerable 33% in the last month. Even longer term holders have taken a real hit with the stock declining 20% in the last year.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Vetoquinol

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

We can tell from its P/E ratio of 16.27 that sentiment around Vetoquinol isn't particularly high. The image below shows that Vetoquinol has a lower P/E than the average (19.3) P/E for companies in the pharmaceuticals industry.

ENXTPA:VETO Price Estimation Relative to Market March 30th 2020
ENXTPA:VETO Price Estimation Relative to Market March 30th 2020

Its relatively low P/E ratio indicates that Vetoquinol 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. 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Vetoquinol's earnings per share fell by 7.6% in the last twelve months. But it has grown its earnings per share by 5.4% 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. 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.

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.

Is Debt Impacting Vetoquinol's P/E?

Since Vetoquinol holds net cash of €46m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Vetoquinol's P/E Ratio

Vetoquinol trades on a P/E ratio of 16.3, which is above its market average of 13.2. Falling earnings per share is probably keeping traditional value investors away, but the relatively strong balance sheet will allow the company time to invest in growth. Clearly, the high P/E indicates shareholders think it will! What can be absolutely certain is that the market has become significantly less optimistic about Vetoquinol over the last month, with the P/E ratio falling from 24.3 back then to 16.3 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

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: Vetoquinol 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.

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