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Unfortunately for some shareholders, the UFP Technologies (NASDAQ:UFPT) share price has dived 30% in the last thirty days. The bad news is that the recent drop obliterated the last year's worth of gains; the stock is flat over twelve months.
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). 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.
Does UFP Technologies Have A Relatively High Or Low P/E For Its Industry?
UFP Technologies has a P/E ratio of 13.05. As you can see below UFP Technologies has a P/E ratio that is fairly close for the average for the packaging industry, which is 13.7.
UFP Technologies's P/E tells us that market participants think its prospects are roughly in line with its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
Notably, UFP Technologies grew EPS by a whopping 37% in the last year. And its annual EPS growth rate over 5 years is 20%. So we'd generally expect it to have a relatively high P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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 expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
UFP Technologies's Balance Sheet
The extra options and safety that comes with UFP Technologies's US$3.4m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On UFP Technologies's P/E Ratio
UFP Technologies has a P/E of 13.0. That's around the same as the average in the US market, which is 12.7. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect UFP Technologies to have a higher P/E ratio. Given UFP Technologies's P/E ratio has declined from 18.7 to 13.0 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 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 report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than UFP Technologies. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at email@example.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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