A Sliding Share Price Has Us Looking At Intertape Polymer Group Inc.'s (TSE:ITP) P/E Ratio
Unfortunately for some shareholders, the Intertape Polymer Group (TSE:ITP) share price has dived 32% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 38% in that time.
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. So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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 Intertape Polymer Group
How Does Intertape Polymer Group's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 12.46 that sentiment around Intertape Polymer Group isn't particularly high. If you look at the image below, you can see Intertape Polymer Group has a lower P/E than the average (15.4) in the packaging industry classification.
This suggests that market participants think Intertape Polymer Group will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Intertape Polymer Group's earnings per share fell by 30% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 13% annually. This could justify a pessimistic P/E.
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. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Intertape Polymer Group's Balance Sheet
Intertape Polymer Group's net debt is 99% of its market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Verdict On Intertape Polymer Group's P/E Ratio
Intertape Polymer Group trades on a P/E ratio of 12.5, which is fairly close to the CA market average of 13.4. 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. Given Intertape Polymer Group's P/E ratio has declined from 18.3 to 12.5 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. 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.
Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
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.
