U.S. markets closed

A Sliding Share Price Has Us Looking At Prime Financial Group Limited's (ASX:PFG) P/E Ratio

Simply Wall St

Unfortunately for some shareholders, the Prime Financial Group (ASX:PFG) share price has dived 43% in the last thirty days. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 47% drop 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. 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). 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.

View our latest analysis for Prime Financial Group

Does Prime Financial Group Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 5.80 that sentiment around Prime Financial Group isn't particularly high. If you look at the image below, you can see Prime Financial Group has a lower P/E than the average (12.5) in the capital markets industry classification.

ASX:PFG Price Estimation Relative to Market, March 21st 2020

Its relatively low P/E ratio indicates that Prime Financial Group 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. 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 even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Prime Financial Group increased earnings per share by a whopping 29% last year. In contrast, EPS has decreased by 17%, annually, over 5 years.

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

The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Prime Financial Group's Balance Sheet

Prime Financial Group's net debt is considerable, at 137% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Bottom Line On Prime Financial Group's P/E Ratio

Prime Financial Group has a P/E of 5.8. That's below the average in the AU market, which is 12.5. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What can be absolutely certain is that the market has become more pessimistic about Prime Financial Group over the last month, with the P/E ratio falling from 10.1 back then to 5.8 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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Prime Financial Group. 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.