Unfortunately for some shareholders, the MTS Systems (NASDAQ:MTSC) share price has dived 34% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 46% in that time.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
How Does MTS Systems's P/E Ratio Compare To Its Peers?
MTS Systems's P/E is 14.67. As you can see below MTS Systems has a P/E ratio that is fairly close for the average for the electronic industry, which is 15.7.
MTS Systems's P/E tells us that market participants think its prospects are roughly in line with its industry. So if MTS Systems actually outperforms its peers going forward, that should be a positive for the share price. 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
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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
MTS Systems's earnings per share fell by 3.0% in the last twelve months. But it has grown its earnings per share by 24% per year over the last three years. And over the longer term (5 years) earnings per share have decreased 8.6% annually. So it would be surprising to see a high P/E.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.
So What Does MTS Systems's Balance Sheet Tell Us?
MTS Systems's net debt is 86% 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 Bottom Line On MTS Systems's P/E Ratio
MTS Systems has a P/E of 14.7. That's around the same as the average in the US market, which is 15.1. With significant debt and no EPS growth last year, the P/E suggests shareholders are expecting higher profit in the future. What can be absolutely certain is that the market has become significantly less optimistic about MTS Systems over the last month, with the P/E ratio falling from 22.2 back then to 14.7 today. 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. 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.
You might be able to find a better buy than MTS Systems. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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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