TVA Group (TSE:TVA.B) shareholders are no doubt pleased to see that the share price has had a great month, posting a 37% gain, recovering from prior weakness. The full year gain of 14% is pretty reasonable, too.
All else being equal, a sharp share price increase should make a stock less 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 some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 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 TVA Group Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 8.55 that sentiment around TVA Group isn't particularly high. If you look at the image below, you can see TVA Group has a lower P/E than the average (14.6) in the media industry classification.
Its relatively low P/E ratio indicates that TVA Group shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with TVA Group, it's quite possible it could surprise on the upside. 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
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. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
TVA Group's earnings per share grew by -5.3% in the last twelve months.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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).
Is Debt Impacting TVA Group's P/E?
TVA Group's net debt is 51% of its market cap. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.
The Verdict On TVA Group's P/E Ratio
TVA Group trades on a P/E ratio of 8.5, which is below the CA market average of 15.8. The meaningful debt load is probably contributing to low expectations, even though it has improved earnings recently. What we know for sure is that investors are becoming less uncomfortable about TVA Group's prospects, since they have pushed its P/E ratio from 6.2 to 8.5 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
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 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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