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A Sliding Share Price Has Us Looking At Infigen Energy Limited's (ASX:IFN) P/E Ratio

Simply Wall St

Unfortunately for some shareholders, the Infigen Energy (ASX:IFN) share price has dived 37% in the last thirty days. Even longer term holders have taken a real hit with the stock declining 3.2% 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. 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.

See our latest analysis for Infigen Energy

Does Infigen Energy Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 9.48 that sentiment around Infigen Energy isn't particularly high. We can see in the image below that the average P/E (17.5) for companies in the renewable energy industry is higher than Infigen Energy's P/E.

ASX:IFN Price Estimation Relative to Market, March 16th 2020

Its relatively low P/E ratio indicates that Infigen Energy shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Infigen Energy, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. 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.

Infigen Energy increased earnings per share by an impressive 15% over the last twelve months. And its annual EPS growth rate over 3 years is 6.3%. So one might expect an above average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. 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.

Is Debt Impacting Infigen Energy's P/E?

Infigen Energy's net debt is considerable, at 101% 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 Infigen Energy's P/E Ratio

Infigen Energy has a P/E of 9.5. That's below the average in the AU market, which is 14.9. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What can be absolutely certain is that the market has become more pessimistic about Infigen Energy over the last month, with the P/E ratio falling from 15.0 back then to 9.5 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors should be looking to buy stocks that the market is wrong about. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than Infigen Energy. 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 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.